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25–443 PDF 2006

S. HRG. 109–231

THE IMPACT OF HURRICANE KATRINA ON THE

AVIATION INDUSTRY

HEARING

BEFORE THE

SUBCOMMITTEE ON AVIATION

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

SEPTEMBER 14, 2005

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(II)

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

TED STEVENS, Alaska, Chairman 

JOHN MCCAIN, Arizona 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

DANIEL K. INOUYE, Hawaii, Co-Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

E. BENJAMIN NELSON, Nebraska 

MARK PRYOR, Arkansas 

LISA J. SUTHERLAND, Republican Staff Director 

CHRISTINE DRAGER KURTH, Republican Deputy Staff Director 

DAVID RUSSELL, Republican Chief Counsel 

MARGARET L. CUMMISKY, Democratic Staff Director and Chief Counsel 

SAMUEL E. WHITEHORN, Democratic Deputy Staff Director and General Counsel 

LILA HARPER HELMS, Democratic Policy Director 

SUBCOMMITTEE ON AVIATION 

CONRAD BURNS, Montana, Chairman 

TED STEVENS, Alaska 

JOHN MCCAIN, Arizona 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

JOHN D. ROCKEFELLER IV, West Virginia, 

Ranking 

DANIEL K. INOUYE, Hawaii 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

BILL NELSON, Florida 

E. BENJAMIN NELSON, Nebraska 

MARK PRYOR, Arkansas 

(III)

C O N T E N T S 

Page 

Hearing held on September 14, 2005 ..................................................................... 1

Statement of Senator Burns ................................................................................... 1

Statement of Senator Lott ...................................................................................... 29

Statement of Senator McCain ................................................................................. 2

Statement of Senator Stevens ................................................................................ 2

WITNESSES

Gruenspecht, Dr. Howard K., Deputy Administrator, U.S. Energy Information 

Administration ..................................................................................................... 3

Prepared statement .......................................................................................... 5

May, James C., President and CEO, Air Transport Association of America, 

Inc. ......................................................................................................................... 7

Prepared statement .......................................................................................... 10

McElroy, Deborah C., President, Regional Airline Association ........................... 19

Prepared statement .......................................................................................... 21

Miller, Frank, Airport Director, Pensacola Regional Airport ............................... 14

Prepared statement .......................................................................................... 17

APPENDIX

Inouye, Hon. Daniel K., U.S. Senator from Hawaii, prepared statement ........... 35

Lautenberg, Hon. Frank R., U.S. Senator from New Jersey, prepared statement ...................................................................................................................... 36

(1)

THE IMPACT OF HURRICANE KATRINA ON 

THE AVIATION INDUSTRY 

WEDNESDAY, SEPTEMBER 14, 2005

U.S. SENATE, 

SUBCOMMITTEE ON AVIATION, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:03 a.m. in room 

SD–562, Dirksen Senate Office Building, Hon. Conrad Burns, 

Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF HON. CONRAD BURNS,

U.S. SENATOR FROM MONTANA 

Senator BURNS. I am going to call this Committee to order, and 

we have other Members coming. We also have an 11 o’clock vote. 

So we are going to hold your statements down as much as we can 

and get to hear from our panel this morning, and I want to thank 

the panel for joining us. 

We have a lot of ground to cover. Ever since Katrina decided to 

pay a visit to our southern shores, we have been in a situation 

where it is going to take some real work and working together to 

get us out of it. As you know, it is our responsibility as a Subcommittee to start evaluating ideas on how we can assist the region and the affected industries in the coming days ahead. 

I am hopeful that the panel today can provide suggestions on 

how their respective industries can be aided by cutting through 

some red tape using waivers or possible legislative proposals. I 

know at times like this we have a tendency to think legislation is 

necessary when sometimes it is not. It is just doing the things that 

we should be doing in order to assist those who have been impacted 

by this storm to recover. 

The greatest concern to the industry now is fuel prices and supplies. The Gulf Coast region accounts for about 23 percent of the 

U.S. jet fuel production. We witnessed a dramatic spike in fuel 

prices in the direct aftermath of the storm. Fortunately, they have 

started to come down now but, unfortunately, they are still at 

record levels, and we are only starting to see the onset of tropical 

storm season which could have increasingly dynamic effects on jet 

fuel prices for some time to come. So we have got some tough 

months ahead for this industry regardless of what Congress does 

or does not act upon. 

Both United and US Airways are in bankruptcy. And reports 

show that Delta and Northwest are heading into Chapter 11 also, 

2

and that may be closer than we think. If fuel prices maintain these 

levels, more will certainly follow. 

On a final note, I would like to commend those in the aviation 

industry for their response to Katrina and its victims. The airlift 

operations were tremendously helpful to the region, and our thanks 

goes out to the entire community: Commercial carriers, business 

aviation, airports, and general aviation alike. And I would like to 

thank this panel for coming today. We appreciate your time. 

Senator McCain. 

STATEMENT OF HON. JOHN MCCAIN,

U.S. SENATOR FROM ARIZONA 

Senator MCCAIN. Well, thank you, Mr. Chairman, and thank you 

for the timeliness of this hearing. As we see and are greeted by this 

morning’s headlines that two airlines are likely to go into bankruptcy and perhaps some of our witnesses, particularly, Mr. May, 

might describe to us what he feels is the future of the aviation industry with or without Hurricane Katrina, because the price of fuel 

had gone up dramatically prior to the hurricane, which is what has 

brought two additional airlines to the brink of, or actual, bankruptcy. 

I notice that Ms. McElroy has a proposal to declare a moratorium 

on various taxes and fees that are imposed on the airlines. I do not 

think we should ignore any option. I guess that when those fees are 

suspended we would have to make up for that shortfall, and I 

would be interested in ideas as to how we would do that. 

So, Mr. Chairman, I come here this morning with a lot more 

questions than answers, and I am sure that our witnesses share 

our deepening concern. I think that the airlines have been in crisis 

in the past, but I am not sure I have seen anything quite approaching this and so maybe we ought to try to get some different ideas. 

So, I thank you, Mr. Chairman. I thank the witnesses for being 

here today. 

Senator BURNS. Senator Stevens. 

STATEMENT OF HON. TED STEVENS,

U.S. SENATOR FROM ALASKA 

The CHAIRMAN. Mr. Chairman, if we are going to have a vote at 

11 o’clock, I would like to get through all these things if we could. 

Thank you very much. 

Senator BURNS. And, thank you, Senator. 

We will roll right along this morning and get into this discussion. 

I think the panel before us is a very important panel. We have 

Dr. Howard K. Gruenspecht, Deputy Administrator, U.S. Energy 

Information Administration; and Mr. James May, who is President 

and CEO of the Air Transport Association; and Frank Miller, Airport Director, Pensacola Regional Airport; and Deborah McElroy, 

President of the Regional Airline Association. 

By the way, I got an e-mail this morning from my regional airline in Montana. They send you their regards. 

If we could call on Dr. Howard Gruenspecht, this morning. He 

is the Administrator of the U.S. Energy Information Administration. 

3

STATEMENT OF DR. HOWARD K. GRUENSPECHT,

DEPUTY ADMINISTRATOR, U.S. ENERGY INFORMATION

ADMINISTRATION 

Dr. GRUENSPECHT. Thank you, Mr. Chairman and Members of 

the Committee. 

I appreciate the opportunity to appear before you today to discuss recent developments in energy markets and the impacts of 

Hurricane Katrina on jet fuel supply and prices. 

The Energy Information Administration is the independent statistical and analytical agency within the Department of Energy. We 

do not promote, formulate or take positions on policy issues. 

As we all know, Hurricane Katrina has wrought incredible devastation on the central Gulf Coast, most importantly in terms of 

human suffering, but also in terms of economic impacts that have 

spread well beyond the stricken area. The oil and gas industry, 

with many facilities in the direct path of the hurricane, incurred 

significant losses in production and processing capacity, of which 

some were temporary, but others will continue to affect output for 

many months to come. 

As Senator McCain alluded to, even before Hurricane Katrina 

struck on August 29th, crude oil and petroleum prices were setting 

records. On August 26th, the near-month price of crude oil on the 

New York Mercantile Exchange closed at over $66.00 per barrel, 

which was $23.00 per barrel or more than 50 percent higher than 

a year earlier. 

Over the same 1-year period, retail gasoline prices had risen 74 

cents per gallon; retail diesel fuel prices 72 cents; and spot jet fuel 

prices between 69 and 77 cents per gallon. Oil prices worldwide 

have been rising steadily since 2002, due in large part to growth 

in global demand, which has used up much of the world’s surplus 

production capacity. Refineries have been running at increasingly 

high levels of utilization in many parts of the world, including the 

United States. 

Hurricane Katrina shut down virtually all offshore oil production 

in the Gulf of Mexico, along with eight major and several smaller 

refineries, import facilities, including the Louisiana Offshore Oil 

Port, and several major crude oil and petroleum product pipelines. 

At its peak impact, over 25 percent of U.S. crude oil production, 20 

percent of crude oil imports, and 10 percent of domestic refinery capacity was shut down. 

Many of these facilities have since restarted, but about 860,000 

barrels per day of crude oil production remains offline, along with 

four major refineries with a total distillation capacity of 880,000 

barrels per day. At their historical yield, these four refineries 

produce, approximately, 120,000 barrels per day of jet fuel, accounting for 8 percent of total U.S. gas fuel production of about 1.6 

million barrels per day. Jet fuel consumption, measured as product 

supplied, also averages about 1.6 million barrels per day. So there 

is a relatively close balance between production and consumption 

of jet fuel in the United States. 

With 42 gallons in a barrel, a 50-cent-per-gallon change in jet 

fuel prices translates into a change of more than $30 million in 

daily jet fuel expenditures for the Nation as a whole, not including 

4

the ameliorative effects of hedging and long-term contracts. So, 

that is a pretty significant issue. 

In the immediate aftermath of Hurricane Katrina, crude oil 

prices rose briefly to over $70.00 per barrel, up more than $4.00 

in less than 48 hours, but in less than a week had fallen below 

their pre-storm levels. The impact on crude oil prices was undoubtedly lessened by the relatively robust inventory levels before the 

storm, by quick assurance that refiners unable to obtain adequate 

crude would be able to borrow, by way of time exchanges, from the 

Strategic Petroleum Reserve, even before the coordinated release of 

stocks by the United States and other members of the International Energy Agency was announced on September 2nd. 

The more significant price impact, however, was on finished petroleum products. Spot prices, the level at which large volumes are 

sold by refiners, importers, and traders, for gasoline rose as much 

as $1.40 a gallon east of the Rockies within 3 days, while spot diesel fuel prices rose 35 to 40 cents, and spot prices for jet fuel rose 

around 50 cents a gallon. The sudden increase in product prices 

was the primary driver of an increase in the so-called ‘‘crack 

spread,’’ defined as the difference between the petroleum product 

price and the underlying price of crude oil. Crude oil prices did not 

change nearly as much as product prices did. 

The seemingly disproportionate change in finished product prices 

reflects the severity and expected persistence of Katrina’s impact 

on refining operations in the Gulf. Additionally, the shutdown of 

the Capline, a major crude oil pipeline from Louisiana to the Midwest, reduced crude supplies for refineries there, causing several to 

temporarily reduce operations. And there was also a temporary closure of Colonial and Plantation pipelines that halted the distribution of products from the Gulf Coast to the lower East Coast, as 

far north as Baltimore, in the aftermath of Katrina. 

While recent movements in crack spreads were heavily influenced by Hurricane Katrina, crack spreads were trending upwards 

well before the storm struck. This is true not just for jet fuel, but 

for other petroleum products. As U.S. refineries have operated increasingly close to full capacity, and product demand continues to 

rise, the balance of demand must increasingly be made up from imports. This, in turn, requires a price differential between the 

United States and other world markets to attract the needed imports. This does not increase the cost of refining products in the 

United States, but it does tend to increase the market value of finished petroleum products relative to crude oil. 

Wholesale petroleum product prices, like those of crude oil, have 

fallen back from their peak levels, and as of yesterday, were near 

their levels before Hurricane Katrina. Spot prices for jet fuel have 

dropped by 54 cents per gallon on the Gulf Coast and 44 per gallon 

in New York Harbor, and stand about 1 cent under and 6 cents 

over, respectively, their levels on August 26, before Katrina struck. 

Other petroleum product prices have shown similar trends; although gasoline prices have not receded as much as prices for distillate products. 

Availability was another issue of some concern in the wake of 

Katrina. While there were rumors, or while there were reported rumors, of imminent outages of jet fuel at certain airports—I think 

5

you will hear about Pensacola—to EIA’s knowledge, no major airports actually ran out of jet fuel. 

Inventories are in reasonably good shape. They did decline in the 

week after Katrina. We are going to release more inventory data 

today after 10:30. So if the questioning goes on, I’ll discuss it, but 

I cannot before then. 

The near-term outlook for oil markets depends on a number of 

factors, the rate at which refinery capacity affected by Katrina can 

be brought back online in the major factor affecting petroleum 

product markets. Although full damage assessments for the four refineries shut down have not yet been possible, early estimates indicate that several of them may be down for several months. 

Even if things are fully restored by December, prices for all petroleum products are likely to remain elevated. Last week, we released our monthly Short-Term Energy Outlook. We looked at several cases, fast recovery, slow recovery, and medium recovery. In 

the medium recovery scenario, we expect the average price for refinery sales of jet fuel to be about $2.25 per gallon in September, 

which is 32 cents above the August level. We do expect it to decline 

by the end of the year to the neighborhood of $2.10. These prices 

are significantly above the year ago levels. 

Again, we expect some of this Gulf Coast refining capacity to remain offline well into the fourth quarter, and we probably will have 

a need for greater imports of jet fuel in the remainder of 2005. 

That concludes my statement, and I would be happy to answer 

your questions. 

[The prepared statement of Dr. Gruenspecht follows:]

PREPARED STATEMENT OF DR. HOWARD K. GRUENSPECHT, DEPUTY ADMINISTRATOR, 

U.S. ENERGY INFORMATION ADMINISTRATION

Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to appear before you today to discuss recent developments in energy markets and the impacts of Hurricane Katrina on jet fuel supply 

and prices. 

The Energy Information Administration (EIA) is the independent statistical and 

analytical agency in the Department of Energy. We do not promote, formulate, or 

take positions on policy issues. 

Hurricane Katrina has wrought incredible devastation on the central Gulf Coast, 

most importantly in terms of human suffering, but also in economic impacts that 

have spread well beyond the stricken area. The oil and gas industry, with many facilities in the direct path of the hurricane, incurred significant losses in production 

and processing capacity, of which some were temporary, but others will continue to 

affect output for many months to come. 

Even before Hurricane Katrina struck on August 29th, crude oil and petroleum 

product prices were setting records. On August 26, the near-month price of crude 

oil on the New York Mercantile Exchange closed at over $66 per barrel, which was 

$23 per barrel, or more than 50 percent, higher than a year earlier. Over the same 

one-year period, retail gasoline prices had risen 74 cents per gallon, retail diesel fuel 

prices 72 cents, and spot jet fuel prices between 69 and 77 cents per gallon. Oil 

prices worldwide had been rising steadily since 2002, due in large part to growth 

in global demand, which has used up much of the world’s surplus production capacity. Refineries have been running at increasingly high levels of utilization in many 

parts of the world, including the United States. 

Hurricane Katrina shut down virtually all offshore oil production in the Gulf of 

Mexico, along with eight major and several smaller refineries, import facilities including the Louisiana Offshore Oil Port, and several major crude oil and petroleum 

product pipelines. At its peak impact, over 25 percent of U.S. crude oil production, 

20 percent of crude imports, and 10 percent of domestic refinery capacity was shut 

down. 

6

Many of these facilities have since restarted, but about 860 thousand barrels per 

day of crude oil production remains offline, along with four major refineries with 

a total distillation capacity of 880 thousand barrels per day. At their historical 

yields, these four refineries produce approximately 120 thousand barrels per day of 

jet fuel, accounting for 8 percent of total U.S. jet fuel production of 1.6 million barrels per day. Jet fuel consumption, measured as product supplied, also averages 

about 1.6 million barrels per day, so there is a relatively close balance between production and consumption. With 42 gallons in a barrel, a 50-cent-per-gallon change 

in jet fuel prices translates into a change of roughly $30 million in daily jet fuel 

expenditures for the nation as a whole, not considering the ameliorative effects of 

any hedges or long-term contract arrangements. 

In the immediate aftermath of Hurricane Katrina, with the extent of actual damage still largely unknown, crude oil prices rose briefly over $70 per barrel, up more 

than $4 in less than 48 hours, but in less than a week had fallen below their prestorm levels. The impact on crude oil prices was undoubtedly lessened by the relatively robust inventory levels before the storm, and by quick assurance that refiners unable to obtain adequate crude oil supplies would be able to borrow by way 

of time exchanges from the Strategic Petroleum Reserve, even before the coordinated release of stocks by the United States and other members of the International 

Energy Agency was announced on Friday, September 2. 

The more significant price impact, however, was on finished petroleum products. 

Spot prices (the level at which large volumes are sold by refiners, importers, and 

traders) for gasoline rose as much as $1.40 per gallon east of the Rockies within 

3 days, while spot diesel fuel prices rose 35 to 40 cents, and those for jet fuel around 

50 cents. Even prices on the West Coast were affected, though by lesser amounts. 

The sudden increase in product prices was the primary driver of an increase in the 

so-called ‘‘crack spread,’’ defined as the difference between a petroleum product price 

and the underlying price of crude oil. 

The seemingly disproportionate change in finished product prices reflects the severity and expected persistence of Hurricane Katrina’s impact on refining operations 

in the Gulf. Additionally, the shutdown of the Capline, a major crude oil pipeline 

from Louisiana to the Midwest, reduced crude supplies to refineries there, causing 

several to temporarily reduce operations. Finally, the temporary closure of the Colonial and Plantation product pipelines virtually halted distribution of products from 

the Gulf Coast to the lower East Coast, as far north as Baltimore, in the aftermath 

of Katrina. 

While recent movements in crack spreads were heavily influenced by the effects 

of Hurricane Katrina, crack spreads were trending upwards well before the storm 

struck. As U.S. refineries have operated increasingly close to full capacity, and product demand continues to rise, the balance of demand must increasingly be made up 

from imports. This, in turn, requires a sufficient price differential between the 

United States and other world markets to attract the needed imports. Although this 

does not increase the cost of refining products in the United States, it does tend to 

increase the market value of finished petroleum products relative to crude oil. 

Wholesale petroleum product prices, like those of crude oil, have fallen back from 

their peak levels, and as of yesterday (September 13) were near their levels before 

Hurricane Katrina. Spot prices for jet fuel have dropped by 54 cents on the Gulf 

Coast and 44 cents in New York Harbor, and stand about 1 cent under and 6 cents 

over, respectively, their levels on August 26, before Hurricane Katrina. Other petroleum product prices have shown similar trends, although gasoline prices have not 

receded as much as prices for distillate products. 

Availability of fuels was another issue of some concern in the wake of Hurricane 

Katrina. While there were widely reported rumors of imminent outages of jet fuel 

at certain airports in the days following Katrina, to EIA’s knowledge, no airports 

actually ran out of fuel. 

Jet fuel inventories, which were in relatively good shape before the storm, did decline, but have remained adequate in all regions so far. In the week ending September 2, U.S. total jet fuel inventories dropped by an estimated 1.6 million barrels, 

or slightly less than one day’s demand. The East Coast, the region most affected 

due to the pipeline shutdowns and its reliance on supplies from Gulf Coast refineries, accounted for nearly 1.4 million barrels of the decline, equivalent to more than 

two days of demand in that region. It should be recognized that supplies of all petroleum products, including jet fuel, will remain tight in the coming weeks, and possibly months, although increased imports may make up some of the overall product 

shortfall. 

While the near-term outlook for oil markets depends on a number of factors, the 

rate at which refinery capacity affected by Katrina can be brought back on-line is 

the major factor affecting petroleum product markets. Although full damage assessVerDate 0ct 09 2002 13:45 Jan 24, 2006 Jkt 025443 PO 00000 Frm 00010 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\25443.TXT JACK PsN: JACKF
7

ments for the four refineries remaining shut down have not yet been possible, early 

estimates indicate that several of them may be down for months. 

Even if the energy system is fully or near fully restored by December, prices for 

all petroleum products are likely to remain elevated. Last Wednesday, we released 

our monthly Short-Term Energy Outlook. For this Outlook, we considered three 

cases based on the speed of recovery of the energy system from the effects of Hurricane Katrina—Slow, Medium, and Fast Recovery scenarios. 

In the Medium Recovery scenario, we project an average price for refiner sales 

of jet fuel of roughly $2.25 per gallon in September, up about 32 cents from the August level, which declines to about $2.10 per gallon by December. This September 

price would be about 94 cents per gallon higher than the same month a year ago, 

while that in December would represent a year-to-year increase of about 79 cents 

per gallon. 

In line with the impacts seen already in September, and a significant portion of 

Gulf Coast refinery capacity expected to remain offline well into the fourth quarter, 

EIA’s Short-Term Energy Outlook also reflects our expectation for lower refinery 

production, lower inventories, and a need for greater imports of jet fuel in the remainder of 2005. 

This concludes my statement, and I will be happy to answer your questions.

Senator BURNS. Thank you very much. 

Now, we will hear from Mr. James May, President and CEO of 

Air Transport Association Incorporated. Thanks for coming this 

morning, Jim. 

STATEMENT OF JAMES C. MAY, PRESIDENT AND CEO, AIR 

TRANSPORT ASSOCIATION OF AMERICA, INC. 

Mr. MAY. Thank you, Mr. Chairman. 

For the airlines, the most immediate impacts from Katrina were 

reduced fuel supplies as you have heard; some airport closures; 

and, of course, dramatically increased fuels prices. Having lost, 

roughly, 13 percent of refining capacity and the two major pipelines 

that serve the East Coast, we were forced to manage our way 

through potential shortages in order to avoid service interruptions. 

Again, this is something you have heard a little bit about already 

this morning. 

We, basically, tankered extra fuel where needed, and that is the 

process of loading greater amounts of fuel in the airports so that 

we would not be drawing down at those most supply restricted airports. We set up a daily conference call working with the pipeline 

folks, the refiners, all the carriers, and other suppliers to the process so that we could identify those areas where we had problems, 

move fuel in. And, I think the Federal Government did a good job 

of giving us some waivers on the Jones Act. IEA had an opportunity to do some releases. 

We moved some tankers around, and while supplies are tight at 

some of the airports, I think we are well past that immediate crisis. 

We, obviously, were impacted by airport closures, principally Gulfport/Biloxi, New Orleans. Service in the region has, largely, been 

restored with the exception of New Orleans, which has got commercial service that kicked in yesterday on a limited basis, and I think 

we will begin to ramp up for a period of time. 

The more lasting impact from Katrina, however, is the dramatic 

increase in the price of jet fuel, which has been talked about this 

morning. Unfortunately, it was already at record highs. Let me put 

it into perspective for you from the parochial side of the airlines industry. In January 2002, the price of jet fuel on the spot market 

averaged nearly 56 cents a gallon. Shortly before Katrina, that 

8

price stood at $1.87 a gallon, and today spot is about $1.92. That 

was yesterday’s price. That is a 243-percent increase over 4 years. 

Driving the price of jet fuel is the cost of crude oil, now hovering in the mid-$60s a barrel, and of the additional premium that refiners charge to produce jet fuel, the so-called ‘‘crack spread.’’ Now, 

this premium has grown dramatically in recent years and it exploded after Katrina. In 2002, it averaged $3.63 a barrel. Shortly after Katrina, it peaked at $30.00 a barrel. 

So, for all of 2005 we estimate that premium, that crack spread, will exceed $15.00, a 400-plus percent increase over 4 years. Now, 

no business model at any airline can survive with sustained jet fuel 

prices in what amounts to a $90.00 to $100.00 per barrel range. 

The future is not bright. Our latest forecast shows that we are going to pay $9.2 billion more for fuel in 2005 than we did in 2004, 

and in 2005, we burned roughly 19 billion gallons of jet fuel and 

spent, roughly, $30.6 billion for that fuel. No wonder this industry 

is now projecting a nearly $10 billion loss for 2005 on top of the 

$32.3 billion we have already recorded over the last 3 years. 

Now, to cope with this unprecedented situation, this industry has 

not simply sat back. We have taken and continue to take aggressive measures to mitigate fuel consumption, just as we were doing 

before Katrina. From 2001 to 2004 alone, thanks to newer fleets, 

single-engine taxi, lower cruise speeds, onboard weight reduction, 

access to more direct ATC routings, and a host of other measures, 

our fuel efficiency jumped nearly 20 percent, and it has tripled 

since 1971. 

We responded by sharply reducing or limiting control costs in our 

business; revising long-standing collective bargaining agreements; 

streamlining operations; refining and, in some cases, even reducing 

hub operations; improving employee productivity; and overall productivity has risen a little less than 20 percent since the year 2000, 

up almost 2.2 million available seat miles per full-time employee. 

We are parking less efficient airplanes. The big six passenger airlines reduced their operating fleets by over 500 aircraft from December 2000 to present and, unfortunately, these efforts have resulted in the loss of some 135,000 jobs in this industry alone. Now, 

for the same group, capital expenditures fell by $10 billion over the 

last 4 years. Likewise, unit operating costs, excluding fuel, fell from 

10.3 cents per available seat mile to 9.2 cents, a 6-plus percent improvement. These efforts, truly, have been nothing short of astonishing, and it is clear that if not for the price we must pay for jet 

fuel, the airline industry would be profitable today. In fact, we remain at the mercy of oil markets and the Federal Government. 

Gary Chase of Lehman Brothers is one of the top analysts for 

this industry and he said, and I quote, ‘‘The airline industry has 

moved aggressively to reduce costs in the face of unprecedented 

challenges. On a non-fuel basis, operating profitability is as good 

as it was in the late 1990s. Now, while these facts are exciting, 

they may also be moot. If oil prices do not return to historic 

normals, we see a materially greater chance for oil above $50.00 

than below $40.00 for the next several years. Unfortunately, high 

fuel prices are consuming what would otherwise be an up cycle for 

this industry.’’

9

Now, it must also be recognized that at the end of the day, 

Katrina’s impact is not limited to the airline industry. Every dollar 

increase in the price of a barrel of crude puts another 5,500 airline 

jobs at risk. This industry drives almost $1 trillion in economic activity here in the United States, 10 million jobs. Now, unfortunately, the harm to this industry caused by Katrina and continuing 

high oil prices will work its way into the broader economy, and in 

that sense we are somewhat like the mine and the canary for the 

economy. 

What, if anything, can be done to respond? As I said in my written statement, we have a couple of suggestions. First, we hope that 

this Congress will move to grant a 1-year holiday from what was 

supposed to be a temporary gas tax imposed during the previous 

administration in 1993. That tax was intended to be dedicated to 

deficit reduction that was later moved to the Airport and Airways 

Trust Fund, and I would hope the Congress will favorably entertain suspending it for 1 year, while at the same time ensuring that 

the trust fund, the Aviation Trust Fund, remains whole. 

Second, I think we should find and produce more domestic oil in 

the United States, including reserves from the Arctic National 

Wildlife Refuge, and the outer continental shelf. Other environmentally concerned nations are tapping into their offshore oil and 

natural gas reserves. We must do the same if our aviation network, 

indeed our entire transportation system, is to remain sound and 

competitive in the face of worldwide demand. 

Third, we must add refining capacity in the United States. In the 

long term, if we do not build new refineries and grow overall refining capacity, we are fated to suffer even higher prices for refined 

product, including, home heating oil. The government should encourage the location and development of refineries across the 

United States, not just in the Gulf Coast region. 

And, finally, Congress and appropriate federal regulatory bodies 

should exercise their oversight responsibilities to ensure that markets are driven by consumer demand and market forces, not speculation. Even prior to the run up of oil prices after Katrina, there 

was call for the GAO to examine the Commodity Futures Trading 

Commission’s oversight of domestic petroleum trading. Consideration should be given to whether or not the measures in place to 

limit the impact of speculative trading are adequate. Likewise, the 

dramatic growth in the premium charge for refining crude into jet 

fuel, the crack spread, merits review. 

Last, I would like to take a moment to touch on the industry’s 

support of relief efforts after the hurricane struck. In the days immediately following, we moved into the New Orleans Airport with 

an operation dubbed ‘‘Operation Air Care.’’ We moved some 13,000 

to 14,000 people over 130 flights, and what is important about that 

is this was a fully volunteer operation, the pilots, the crews. We 

even had to carry our own mechanics and ground crews in, and it 

was a terrific effort. We were delighted to be part of it. 

Mr. Chairman, Katrina serves as a reminder of the central role 

that this industry plays not only in our economy, but society at 

large. If our nation is to continue to grow and prosper, the importance of this potent capability that responded so well in a time of 

crisis must be recognized and served by rational policies that foster 

10

economic well-being in growth in the airline industry. This country 

needs a stable airline industry capable of providing diverse passenger and cargo services in good times and bad. 

Taxes and fees imposed on the industry should be brought under 

control, and the government must adopt an energy policy that expands this country’s oil production and refining capacity while respecting environmental concerns. 

Thank you for your attention. 

Senator BURNS. Thank you, Mr. May. 

[The prepared statement of Mr. May follows:]

PREPARED STATEMENT OF JAMES C. MAY, PRESIDENT AND CEO, AIR TRANSPORT

ASSOCIATION OF AMERICA, INC. 

Thank you, Mr. Chairman for inviting me to talk about the effects of Hurricane 

Katrina on U.S. air carriers and their employees. The Air Transport Association is 

the trade association for the leading U.S. airlines. ATA members transport more 

than 90 percent of all passenger and cargo traffic in the United States. 

Our nation has never experienced a natural disaster of the economic scope of Hurricane Katrina. Hurricane Camille in 1969, the San Francisco earthquake in 1989 

and the terrorist attacks of four years ago have served as the unfortunate benchmarks of devastation in recent history... until Katrina. Beyond the human suffering and the loss of life and property, the common thread from each of these disasters is the ripple effects they send beyond the directly affected areas and into the 

national and international economies. While terrorists targeted their attacks on governmental and financial centers in an intentional effort to destroy our way of life, 

Hurricane Katrina, a random act of nature, will have a similarly disruptive effect 

on our economy, because it crippled a significant portion of our nation’s energy infrastructure. Today we are much more dependent upon oil produced from the Gulf 

of Mexico and refined in Texas and Louisiana than we were in 1969 when Camille 

struck. And even small disturbances in the Gulf can have measurable impacts on 

the prices that consumers pay for gasoline and airlines pay for jet fuel. 

Long before the devastation of Katrina, the airline industry was struggling under 

the economic and societal consequences of the attacks of 9/11, the resultant growth 

in federal taxes and fees, and, of course, already record-high oil prices. Air carriers 

are always among the sectors of the economy most affected by the soaring price of 

oil. While our members and the manufacturers of their aircraft have made remarkable gains in energy efficiency, it has proven impossible for conservation measures 

and technology to outpace the growth in the price of a barrel of oil. Unlike many 

industries, we have no alternative fuel source. 

Anyone who follows the news knows that even before Katrina all U.S. airlines 

were facing an extremely challenging commercial and policy environment, with few 

signs of material improvement. Over the last four years, the industry—in total—has 

recorded over $32 billion in net losses (including federal reimbursements for the 

shutdown and a portion of our security costs). In this post-Katrina economic environment of higher fuel prices and lost revenue from Gulf Coast tourism we are projecting additional losses of at least $9 billion in 2005—up from earlier projections 

of $5 to $7 billion. 

These losses have led us to borrow huge sums to survive, with few assets left to 

pledge as collateral. For the nine largest airlines, including Southwest Airlines, net 

debt stood at $81.3 billion at the end of 2004, resulting in a staggering net debtto-capital ratio of 110.1 percent. Compare this to $64.2 billion and 71.7 percent at 

the end of 2000. Eleven of the 12 passenger airlines rated by Standard & Poor’s are 

considered ‘‘speculative’’ investments, also known as ‘‘junk bond’’ quality. Only 

Southwest Airlines is considered investment grade. 

Meanwhile, fares are running at late 1980s levels—a fourth of all domestic passengers now pay $200 or less including taxes for a roundtrip ticket; two-thirds pay 

$300 or less. Airline passenger revenue has plummeted from its historical average 

of 0.95 percent to 0.70 percent of U.S. GDP—a gap of $30 billion based on today’s 

$11.7 trillion economy. 

Long before Katrina, I learned that just when you think it can’t get any worse 

it does, at least in the airline business. In January 2001, the price of jet fuel on 

the spot markets averaged 85.8 cents per gallon. On August 17, as Katrina was 

building in the Gulf of Mexico, the price stood at $1.87. Today it is hovering around 

$2.05 per gallon, a 239 percent increase over four years. In 2004, the industry paid 

11

$21.4 billion for jet fuel. That tab would have been $5.5 billion lower at 2003 jet 

fuel prices and a whopping $8.0 billion lower at 2002 jet fuel prices. 

Moreover, the differential between what refiners pay for a barrel of oil and what 

they are able to sell the same amount of refined product has grown dramatically 

in recent years, and been driven higher since Katrina. In 2002 this refining premium, referred to as the ‘‘crack spread’’ in the industry, stood at an average of 

$3.63. In 2003 it rose to $5.90 and then to $9.24 in 2004. This year we estimate 

a 12 month average in excess of $15.00, which represents a 414 percent increase 

over four years. 

It is not unreasonable to argue that without the doubling of oil prices over the 

past three years the industry would not be in the economic crisis we find ourselves. 

But the future doesn’t look any brighter. Our forecast shows that we will pay $9.2 

billion more for fuel in 2005 than in 2004. If these projections prove accurate, the 

industry will have faced a 103 percent increase in its fuel costs from 2001 ($14.8 

billion) to 2005 ($30.6 billion). When you understand that the industry has been hit 

with more than $30 billion in additional fuel costs and $15 billion in taxes, fees and 

unfunded mandates for security since 9/11, and compare those uncontrollable costs 

to the $32 billion the industry has lost over that period, it easy to see where the 

problems lie. No industry could improve its efficiency and cut its costs fast enough 

to keep up with this kind of growth in their uncontrollable costs. 

On Monday of this week, the 12-month forward curve of future prices stood at 

$66.19 a barrel for crude oil and $1.98 per gallon of jet fuel ($83.16 per barrel). Now 

keep in mind that this industry consumed 18.6 billions gallons of jet fuel last year. 

That means that every penny increase in the price of a gallon increases our annual 

operating expenses by $186 million. Viewed from an employee perspective, every $1 

increase in the price of a barrel of crude puts another 5,500 airline jobs at risk. Indeed, the airlines have shed 135,000 jobs from the payrolls since August 2001. 

That’s a loss of one out of six employees and more cuts are likely. 

When people say to me, ‘‘But every time I fly the plane is full.’’ I respond, ‘‘They’re 

full, alright. Full of cheap fares and expensive fuel.’’ At today’s fares and jet fuel 

prices, the average breakeven load factor for the industry would need to approach 

85 percent, including all the low-cost carriers. Compare that to 65 percent in the 

mid-90s. That means that every single flight on average must be at least 85 percent 

full of paying passengers to avoid losing money—not to make a fortune! 

So how are we coping? First, we obviously are taking all possible steps to reduce 

or mitigate fuel consumption, just as we were doing before Katrina. From 2001 to 

2004 alone, thanks to newer fleets, single-engine taxi, lower cruise speeds, onboard 

weight reduction, access to more ATC lanes in the sky, and a host of other measures, our fuel efficiency jumped 18 percent to 45 passenger miles per gallon. 

For this same group, capital expenditures fell from $13.1 billion in 2000 to $3.1 

billion in 2004 (up slightly from $2.7 billion in 2003), while unit operating costs excluding fuel fell 6.2 percent from 10.36 cents per available seat mile (ASM) in 2002 

to 9.72 cents per ASM in 2004. 

I think that’s pretty impressive. But you don’t have to believe me. As Gary Chase 

of Lehman Brothers observed on March 15:

‘‘The airline industry has moved aggressively to reduce costs in the face of unprecedented challenges . . . On a non-fuel basis, operating profitability . . . is 

as good as it was in the late 1990s. While these facts are exciting . . . , they 

may also be totally moot if oil prices do not return to [historical 

norms]... [W]e see a materially greater chance for oil prices above $50 than 

below $40 over the next several years. Unfortunately, high fuel prices are consuming what would otherwise be an upcycle for the industry.’’

Let me reiterate this point, were it not for fuel costs the industry would be profitable. 

I’m often asked, ‘‘Why don’t your members just raise fares and pass through high 

oil prices?’’ Well, it’s this simple—if we could, we would. To cover the costs of fuel 

increases from 2003 to 2004, passengers would have to pay, on average, an additional $28 per ticket. Yet fares during this period continued to fall because of the 

intensely competitive nature of the industry. Indeed, only recently have carriers had 

even modest successes in raising fares in certain markets. These fare increases are 

hardly enough to cover the cost of crude oil rising from $26 a barrel in 2002 to over 

$66 in 2005. And as Standard & Poor’s Phil Baggaley testified before the House 

Aviation Subcommittee this last year:

‘‘Fuel represents a roughly comparable proportion of expenses for railroads and 

many trucking companies . . . , but they have not been hurt by higher fuel 

prices to nearly the same degree... Part of the difference is due to more acVerDate 0ct 09 2002 13:45 Jan 24, 2006 Jkt 025443 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\25443.TXT JACK PsN: JACKF
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tive hedging programs by these freight transportation companies, but most is 

due to the fact that many of their contracts with corporate customers allow 

them to pass through higher fuel costs in the form of surcharges. Airlines have 

tried repeatedly to raise fares in response to high fuel costs, but with little success. [T]he problem comes back to a lack of pricing power in a very competitive 

market.’’

The unfortunate truth for most airlines today is that the economic principles of 

supply and demand still apply. If we could raise prices to cover the soaring cost of 

jet fuel or the many new taxes and fees that have been placed on the industry in 

recent years we would. But what many of our customers discovered in the post-9/

11 world is that they don’t have to fly. Business travelers choose teleconferences or 

e-mail instead of a face-to-face meeting if they aren’t able to find a rock-bottom fare. 

Families will vacation near home as opposed to flying to Florida’s beaches, Colorado’s ski slopes or grandma’s house. For short-haul flights, the addition of the TSA 

‘‘hassle factor’’ has made taking the car a more viable option. It’s important to remember, airlines don’t just compete against each other. They compete against movie 

theaters, e-mail, video conferencing, automobiles, trains, corporate jets and even the 

local amusement park... anything that can substitute for a vacation or a faceto-face sales call. The loss of several popular vacation destinations along the Gulf 

Coast for the foreseeable future, including New Orleans, will only worsen this trend. 

So where does that leave U.S. air carriers? Frankly, we will remain at the mercy 

of oil markets and the Federal Government. If the price of oil stays high and our 

taxes along with it, I expect more jobs lost, more flights cut and more airlines in 

crisis. In the international arena, our global competitiveness will continue to suffer 

because our airlines are paying disproportionately more than their foreign flag competitors, due to the relative weakness of the dollar. My CEOs will continue to find 

ways to wring costs from those areas they can, and that includes further fuel conservation. But you can only be so efficient. As I said when I started, the airline industry is one of the most severely hurt by the soaring price of oil. Since we have 

no other options, airplanes will be burning refined oil long after other modes of 

transportation have moved beyond it. Not because we want to but because the principles of aircraft design rule out alternatives. 

So, will oil stay above $60? For business planning purposes it is prudent to assume that it will. And while there is nothing that can be done in the short term 

to reverse the continuing damage that high fuel prices are having on the industry, 

the government can take step to help—grant a one-year holiday from the 4.3 

cents-per-gallon jet fuel tax. This tax, imposed in 1993 was intended to be temporary and dedicated to deficit reduction. It was later redirected into the Airport 

and Airway Trust Fund, but remains on the books to this day while similar taxes 

on other transportation have been repealed. 

For the medium and long term, the solution to the problem is to do 

more . . . more of everything. And by more I mean more conservation and more 

production—including here at home. I am proud of the efficiency gains that the 

aviation sector has made over the past 30 years. If other industries throughout the 

world had kept pace, we would not face nearly the crisis we face today. Yet conservation and efficiency are only part of the equation. We must find and produce 

more oil in the U.S. including from the Artic National Wildlife Refuge and the outer 

continental shelf. Other nations that many consider to be more environmentally conscious than the United States such as Norway, Great Britain and Japan are tapping 

into their off-shore oil and natural gas reserves for both national security and economic reasons. Yet in recent years, the United States has moved to expand restrictions on this kind of energy production, including in the recently passed ‘‘Energy 

Policy Act of 2005.’’ Our nation possesses the most advanced oil production technologies in the world and these areas can be produced in an environmentally safe 

manner. In fact Hurricane Katrina proved how environmentally safe they are, since 

there was little or no leakage from the hundreds of off-shore platforms that were 

in the path of the storm, including those that were knocked from their moorings and 

set adrift. 

Specifically, the administration should immediately begin the process of leasing 

for oil production in the remaining area of the eastern Gulf of Mexico known as 

Lease Sale 181. Furthermore, Congress should direct that revenues derived from 

these new leases be dedicated to Hurricane Katrina recovery and reconstruction efforts. 

As I alluded to earlier, the rapid economic expansion in countries like China and 

India will demand more and more oil and keep pushing prices higher. The ‘‘more 

of everything’’ approach can work there, too. The United States should encourage 

13

those nations to find and produce more of their own energy as well as help them 

use it more efficiently by providing them with technologies to reduce waste. 

More of everything also means that as a nation we must be willing to build new 

refineries. I know that this issue is outside of this Committee’s jurisdiction, but our 

nation’s stagnant refining capacity has created a bottleneck in the distribution chain 

that further increases prices, as noted above. Hurricane Katrina immediately 

knocked out 19 percent of U.S. oil refining capacity and 13 percent of our jet fuel 

refining. Had Katrina made landfall further west, the toll on the refiners would 

have been even greater and fuel prices would likely be even higher. While in the 

short term it is critical for our economy that these refineries be restored to full operational capacity as quickly as possible, in the longer term, if we do not begin to 

build new refineries and grow overall refining capacity I fear that we are fated to 

suffer even higher prices. 

New refineries, just like new oil production, should not be concentrated in one 

place, leaving them unnecessarily vulnerable to natural disasters and terrorist attacks. We now know the price we can pay for putting so many of our energy eggs 

into one basket—the Gulf Coast region. 

Also, I encourage Congress and the Administration to ensure that forces are not 

working within western energy markets to unnaturally inflate prices. There are 

simply too many unnatural influences in global oil markets to allow market speculators to contribute to the problem. I encourage Congress and the appropriate federal regulatory bodies to exercise their oversight responsibilities to ensure that markets are driven by consumer demand and not speculation. Even prior to the run up 

of oil prices after Katrina, there were calls for the Government Accountability Office 

(GAO) to examine the Commodity Futures Trading Commission’s (CFTC) oversight 

of domestic petroleum trading. I believe this to be even more appropriate today. 

Some have attacked the airline industry for not being fast enough to adapt to 

market changes. I strongly disagree with this view and point the past three years 

of aggressive cost-saving moves taken by all airlines to stay competitive. I also point 

to the past 30 years of aggressive efforts by the industry to save fuel and improve 

efficiency. We have been and will continue to be leaders in each of these areas. 

In regard to the hurricane’s impact on airport infrastructure and the National 

Airspace System, airports in areas affected by Hurricane Katrina have recovered 

relatively quickly from an operational perspective. There were varying degrees of 

damage to both airport facilities and Federal Aviation Administration (FAA) navigational aids, but in general, airports with commercial service are fully operational. 

New Orleans International Airport (MSY) in particular, suffered some significant 

damage to the airport roof and adjacent facilities, but temporary measures have enabled the restoration of commercial service on September 13. All other commercial 

airports in the region are fully operational. 

Since I have talked to you about the impacts of the hurricane on the airlines, I’d 

now like to tell you of the impact the industry has had on the relief and recovery 

operation. In the days immediately following the disaster, ATA and its member airlines conducted an airlift of Hurricane Katrina victims out of New Orleans to multiple evacuee sites around the nation. Known as ‘‘Operation Air Care,’’ ATA coordinated the scheduling of the aircraft and crews contributed to this vital effort. Over 

a six-day period beginning August 30, ‘‘Operation Air Care’’ evacuated more than 

13,000 people on more than 130 flights to at least nine locations. I would like to 

make clear that this effort was industry-wide, including carriers that currently are 

operating in bankruptcy, and many flight crews that volunteered their time to help 

out. I have never been so proud of our industry and our employees. 

In addition to stepping up to help in the relief efforts in the days after Katrina 

hit, the airlines also were focused on ensuring that there was sufficient jet fuel 

available at all commercial service airports to allow for uninterrupted service. With 

13 percent of jet fuel refining capacity shut down and the two major pipelines that 

serve the East Coast out of commission, swift action was required on the part of 

airlines and fuel suppliers. This allowed for the industry to quickly identify which 

airports faced potential jet fuel shortages and to take measures to prevent service 

interruptions, including disruptions to relief flights. The airlines, out of necessity, 

had to take the Draconian measure of ‘‘tankering’’ fuel, which simply means placing 

extra fuel on planes going into those airports identified as facing shortages. This 

Hobson’s choice successfully prevented those ‘‘at risk’’ airports from running out of 

fuel but resulted in those airplanes flying with greater onboard weight, which increased fuel consumption, i.e., burning more fuel to get fuel where fuel was needed. 

Of course, carrying this extra fuel displaced revenue generating payloads such as 

cargo and passengers, making this stop-gap measure extremely expensive. 

This effort also necessitated close monitoring of those airports from where we 

were drawing fuel, so as not to create shortages there. This was a first-stage crisisVerDate 0ct 09 2002 13:45 Jan 24, 2006 Jkt 025443 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\25443.TXT JACK PsN: JACKF
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control measure that allowed us to meet our schedules and keep our commitments 

to our customers. Unfortunately, with jet fuel prices hitting record highs at the 

same time, it came at an incredible cost. As we return to our normal operations, 

we continue to face jet fuel prices that were incomprehensible only a few months 

ago, and unexpected fuel bills for our efforts to keep the system running during the 

past two weeks. 

As I look back at ‘‘Operation Air Care,’’ I hope that it serves as a reminder of 

the central role that the airline industry plays—not only in our economy but within 

our society. Using the same people and machines that allow for our ‘‘just-in-time’’ 

economy to function, that bring buyers and sellers together, and that reunite grandparents with grandchildren, air carriers were able to bring much needed bottled 

water and relief workers in, and get evacuees out. This massively potent capability 

that served the devastated Gulf Coast areas so well serves an important role every 

day as the economic and transportation engine that quickly connects the expanses 

of our nation to each other and the rest of the world. 

To conclude, for the airlines the saying ‘‘It is always darkest before the storm’’ 

is reversed. We now face an even darker period than we did before Katrina brought 

her 160 mile-per-hour winds and flood waters to the Gulf Coast. Even higher fuel 

prices and the loss of tourism to the impacted areas were, not nor could have, been 

planned for. Let me be very clear about this. No business model at any airline can 

sustain such a rapid increase in fuel prices. 

So, in the immediate term, repeal of the 4.3 cents-per-gallon tax on commercial 

aviation fuel will help protect airline jobs, sustain service to smaller communities, 

foster competition that benefits consumers and allow for this industry, which is so 

critical to the health of our economy, to begin its recovery. 

In the longer term we must take the lessons learned from Katrina and diversify 

our nation’s oil production and refining so that no single natural or man-made disaster can have such a broadreaching impact of our vital energy infrastructure. If 

we do not, prices are certain to continue to climb and the record-high gasoline and 

jet fuel prices we see today will be remembered fondly by consumers and airlines 

as the ‘‘good old days,’’ rather than the darkness after the storm. 

Thank you.

Senator BURNS. Now, we will hear from Mr. Frank Miller, Airport Director at Pensacola Regional Airport of which Senator 

McCain is, probably, pretty familiar. 

STATEMENT OF FRANK MILLER, AIRPORT DIRECTOR, 

PENSACOLA REGIONAL AIRPORT 

Mr. MILLER. Thank you, Mr. Chairman. Pensacola Regional Airport is a small hub airport with 1.6 million total passengers and 

with a staffing level of 50 employees. On September 16, 2004, 

we——

Senator BURNS. Is your microphone on? Push the button. 

Mr. MILLER. I am sorry. 

Pensacola Airport is a small hub airport with 1.6 million total 

passengers and with a staffing level of 50 employees. On September 16, 2004, we were in the path of Hurricane Ivan, one of 

four hurricanes to strike the State of Florida in a 6-week period. 

Pensacola Regional Airport closed its airfield on Wednesday, September 15th, at 3:30 p.m. due to tropical force winds coming in advance of Hurricane Ivan, a Category III hurricane. The hurricane 

made landfall in the early morning hours of September 16, with 

130 mile-per-hour sustained winds. As the hurricane force winds 

subsided in the midmorning hours of September 16th, airport personnel inspected the airfield operating environment, made repairs, 

and by 12:45 p.m. reopened the airfield for emergency relief aircraft only. Roads and highways leading into Escambia and Santa 

Rosa Counties were impassable due to fallen trees, debris, and 

damaged bridges. In response to this, Pensacola Regional Airport 

was designated as the primary staging area for disaster relief supVerDate 0ct 09 2002 13:45 Jan 24, 2006 Jkt 025443 PO 00000 Frm 00018 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\25443.TXT JACK PsN: JACKF
15

plies, filling this role for the first 4 days of disaster relief operations. 

During these 4 days, a mixture of C–17 and C–130 military aircraft began major relief operations, and 24 various civilian and 

military helicopters conducted numerous missions from the airport 

on an around-the-clock basis. With temporary flight rules in place 

over the airport, Pensacola Regional Airport operations personnel 

assumed control of the airfield and issued 219 aircraft landing authorizations. 

Consumable materials, such as unleaded and diesel fuels, were 

a critical component for recovery vehicles and equipment, but due 

to the airport’s limited storage capacity at the fuel farm, the airport quickly became dependent on outside suppliers after exhausting its internal reserves. This put us in direct competition with all 

the other requesting agencies working through the local emergency 

operations center. 

Competing with these other agencies for a finite supply of fuel 

was challenging, given the continuous need for fuel to support electrical generators for the airfield and buildings, for tenant-operated 

aircraft servicing equipment, and personal vehicles for key personnel such as police officers, operations and maintenance personnel, and air traffic controllers to ensure their ability to get to 

and from the airport. 

Seven airports in the southeast United States sent 27 airporttrained personnel to provide immediate assistance to Pensacola. 

The personnel were electricians, HVAC technicians, building maintenance technicians, airfield operations personnel, dispatchers, law 

enforcement officers, and fire fighters. The amount of time these 

personnel stayed in Pensacola varied, but one team stayed for a 

full 7 days. 

Hurricane Ivan disrupted commercial power and water to the 

airport for a total of 8 days. Nearby hotels that were open were 

filled up to capacity with displaced Pensacola residents. Immediately following the hurricane, there was an ongoing demand to 

provide a safe and sanitary off-duty environment for the response 

teams for sleeping, showering, and eating. 

The airport has an integral role in the recovery of a community, 

providing the airfield infrastructure to support airlift relief operations. Hurricane Ivan’s toll on Pensacola Regional Airport made 

it apparent that airports affected by hurricanes would be dependent upon assistance from other airports for personnel, supplies, and 

building materials to recover and begin commercial operations. 

Community-wide disaster relief efforts made it difficult, if not impossible, to rely upon local assistance. Any local assistance would 

not be airport-knowledgeable and unable to work independently of 

local airport personnel. 

Initiated by the Savannah/Hilton Head International Airport, a 

mutual aid network is being established that recognizes the need 

for other airports to provide disaster relief to affected airports and 

thereby minimize the time to resume commercial operations. Pensacola’s experience with Hurricane Ivan also highlighted the need 

for a single outside point of contact or a clearinghouse for assistance. This clearinghouse coordinates the assistance to the damaged 

airport and thereby relieves the affected airport personnel from 

16

taking numerous phone calls offering assistance, and to assure relief efforts were coordinated and controlled. 

Savannah/Hilton Head International Airport accepted the role as 

the clearinghouse, to receive requests for aid and to disseminate 

those requests to the airports in the mutual aid network. 

Although not fully established when Hurricane Katrina hit the 

Gulf Coast, the Southeast Airports Disaster Alliance Group initiated its relief efforts with Savannah/Hilton Head providing the 

agreed upon clearinghouse services. As the relief efforts evolved, 

Pensacola Regional Airport, as the closest fully operational airport 

to Gulfport/Biloxi, became the logistical hub for the airport response teams going into Mississippi. We provided final briefings for 

navigating anticipated road detours, topped off fuel tanks, procured 

and loaded additional supplies, and coordinated housing with local 

hotels for rotating teams. Similar activities were occurring in Houston for aid to the New Orleans Airport. 

The first lesson learned with Hurricane Katrina: One airport 

must serve as the clearinghouse to coordinate mutual aid assistance, while a second airport becomes the logistical hub for the response teams. During the first 2 weeks following Hurricane 

Katrina, the Airports Disaster Alliance Group has worked through 

a learning curve as it provides relief assistance to Gulfport/Biloxi. 

Lessons learned: The airport clearinghouse needs a direct FEMA 

point of contact. This point of contact must be identified 72 hours 

prior to the forecasted landfall and be available immediately after 

the storm to work with the clearinghouse to provide mission numbers for each airport sending response teams into the affected area. 

Mission numbers are critical to ensure teams are able to access the 

affected area through any ground checkpoints that may be present, 

to ensure aircraft can transit the Temporary Flight Rule, TFR, 

area established over the airport, and to ensure reimbursement 

protocols are established for the costs incurred by the responding 

airports. 

During the Gulfport/Biloxi relief effort, airports were delayed 

while awaiting official calls for assistance. The Gulfport/Biloxi Airport Director was required to contact his state EOC to request support from a particular airport. His state EOC then called the responding airports’ state EOC to officially initiate the request for assistance. 

FEMA can and should intervene to make direct requests to the 

airport clearinghouse, initiating specific relief requests without 

going through multiple state contacts, and providing the necessary 

mission numbers at the time of the request. Hurricane response 

equipment and supplies generic to any storm event should be purchased and stored in trucks at a location in the southeast U.S., 

ready and available to be dispatched immediately after a storm. 

These trucks should be dispatched and report to the nearest airport 

identified as the logistical support airport and which shall serve as 

the base for responding teams. An ongoing FEMA presence at this 

airport would serve as the facilitator for the airport relief efforts. 

Examples of supplies to be stored in these trucks would include 

emergency generators, water, MREs, satellite telephones, and 

building supplies. Temporary housing for the responding teams is 

needed to provide the safe and sanitary off-duty living environVerDate 0ct 09 2002 13:45 Jan 24, 2006 Jkt 025443 PO 00000 Frm 00020 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\25443.TXT JACK PsN: JACKF
17

ment. Response teams cannot rely on the availability of local housing. Trailers capable of housing five to seven people with an independent water supply should be stored at the same location as the 

relief supplies and trucks and be a part of the supplies and equipment sent into the area for airport relief efforts. 

As the Airports Disaster Alliance Group evolves, it is clear that 

we have the technical expertise to provide onsite and immediate relief that will help an airport recover and resume operations, but it 

is also clear that our efforts require Federal support to provide the 

necessary coordination with state and local relief efforts, and to 

provide the necessary supplies, equipment, and materials necessary 

to conduct disaster relief operations. Thank you for the opportunity 

to speak this morning. 

Senator BURNS. Thank you. 

[The prepared statement of Mr. Miller follows:]

PREPARED STATEMENT OF FRANK MILLER, AIRPORT DIRECTOR, PENSACOLA REGIONAL

AIRPORT

Pensacola Regional Airport is a small hub airport with 1.6 million total passengers and with a staffing level of 50 employees. On September 16, 2004, we were 

in the path of Hurricane Ivan, one of 4 hurricanes to strike the State of Florida in 

a six week period. 

Pensacola Regional Airport closed its airfield on Wednesday, September 15th, at 

3:30 p.m. due to tropical force winds coming in advance of Hurricane Ivan, a Category III hurricane. The hurricane made landfall in the early morning hours of September 16, 2004 with 130 mph sustained winds. As the hurricane-force winds subsided in the mid-morning hours of September 16th airport personnel inspected the 

airfield operating environment, made repairs, and by 12:45 p.m. re-opened the airfield for emergency relief aircraft only. Roads and highways leading into Escambia 

and Santa Rosa counties were impassable due to fallen trees, debris and damaged 

bridges; in response to this Pensacola Regional Airport was designated as the primary staging area for disaster relief supplies, filling this role for the first 4 days 

of disaster relief operations. 

During these four days a mixture of C–17 and C–130 military aircraft began 

major relief operations, and 24 various civilian and military helicopters conducted 

numerous missions from the airport on an around-the-clock basis. With temporary 

flight rules in place over the airport, Pensacola Regional Airport operations personnel assumed control of the airfield and issued 219 aircraft landing authorizations. 

Consumable materials such as unleaded and diesel fuels were a critical component for recovery vehicles and equipment but due to the airport’s limited storage 

capacity at the fuel farm, the airport quickly became dependent on outside suppliers 

after exhausting its internal reserves. This put us in direct competition with all the 

other requesting agencies working through the local emergency operations center. 

Competing with these other agencies for a finite supply of fuel was challenging 

given the continuous need for fuel to support electrical generators for the airfield 

and buildings, tenant-operated aircraft servicing equipment, and personal vehicles 

of key personnel such as police officers, operations and maintenance personnel, and 

air traffic controllers to ensure their ability to get to and from the airport. 

Seven airports in the southeast sent 27 airport-trained personnel to provide immediate assistance to Pensacola. The personnel were electricians, HVAC technicians, building maintenance technicians, airfield operations personnel, dispatchers, 

law enforcement officers and fire fighters. The amount of time these personnel 

stayed in Pensacola varied, but one team stayed in Pensacola for a full week. Hurricane Ivan disrupted commercial power and water to the airport for a total of 8 days; 

nearby hotels that were habitable were filled to capacity with displaced Pensacola 

residents. Immediately following the hurricane, there was an on-going demand to 

provide a safe and sanitary off-duty environment for the response teams for sleeping, showering and eating. 

The airport has an integral role in the recovery of a community, providing the airfield infrastructure to support airlift relief operations. Hurricane Ivan’s toll on Pensacola Regional Airport made it apparent that airports affected by hurricanes would 

be dependent upon assistance from other airports for personnel, supplies and buildVerDate 0ct 09 2002 13:45 Jan 24, 2006 Jkt 025443 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\25443.TXT JACK PsN: JACKF
18

ing materials to recover and begin commercial operations. Community-wide disaster 

relief efforts made it difficult, if not impossible, to rely upon local assistance. Any 

local assistance would not be airport-knowledgeable and unable to work independently of local airport personnel. 

Initiated by the Savannah/Hilton International Airport, a mutual aid network is 

being established that recognizes the need for other airports to provide disaster relief to affected airports and thereby minimize the time to resume commercial operations. Pensacola’s experience with Hurricane Ivan also highlighted the need for a 

single outside point of contact or a clearinghouse for assistance. This clearinghouse 

coordinates the assistance to the damaged airport and thereby relieves the affected 

airport personnel from taking numerous calls offering assistance and to assure relief 

efforts were coordinated and controlled. 

Savannah/Hilton Head International Airport accepted the role as the clearinghouse, to receive requests for aid and to disseminate those requests to the airports 

in the mutual aid network. 

Although not fully established when Hurricane Katrina hit the Gulf Coast, the 

Southeast Airports Disaster Alliance Group initiated its relief efforts with Savannah/Hilton Head providing the agreed upon clearinghouse services. As the relief efforts evolved Pensacola Regional Airport, as the closest fully operational airport to 

Gulfport/Biloxi, became the logistical hub for the airport response teams going into 

Mississippi. We provided final briefings for navigating anticipated road detours, 

topped off fuel tanks, procured and loaded additional supplies, and coordinated 

housing with local hotels for rotating teams. Similar activities were occurring in 

Houston for aid to the New Orleans airport. 

The first lesson learned with Hurricane Katrina: One airport must serve as the 

clearinghouse to coordinate mutual aid assistance while a second airport becomes 

the logistical hub for the response teams. 

During the first two weeks following Hurricane Katrina the Airports Disaster Alliance Group has worked through a learning curve as it provides relief assistance to 

Gulfport/Biloxi. Lessons learned:

• The airport clearinghouse needs a direct FEMA point of contact. This point of 

contact must be identified 72 hours prior to the forecasted landfall and be available immediately after the storm to work with the clearinghouse to provide mission numbers for each airport sending response teams into the affected area. 

Mission numbers are critical to ensure teams are able to access the affected 

area through any ground checkpoints that may be present, to ensure aircraft 

can transit the Temporary Flight Rule (TFR) area established over the airport, 

and to ensure reimbursement protocols are established for the costs incurred by 

the responding airports.

• During the Gulfport/Biloxi relief effort airports were delayed while awaiting the 

official calls for assistance. The Gulfport/Biloxi Airport Director was required to 

contact his state EOC to request support from a particular airport; his state 

EOC then called the responding airport’s state EOC to officially initiate the request for assistance. FEMA can and should intervene to make direct requests 

to the airport clearinghouse, initiating specific relief requests without going 

through multiple state contacts, and providing the necessary mission numbers 

at the time of the request.

• Hurricane response equipment and supplies generic to any storm event should 

be purchased and stored in trucks at a location in the southeast U.S., ready and 

available to be dispatched immediately after a storm. These trucks should be 

dispatched and report to the nearest airport identified as the logistical support 

airport and which shall serve as the base for responding teams. An on-going 

FEMA presence at this airport would serve as the facilitator for the airport relief efforts. Examples of supplies to be stored in these trucks include emergency 

generators, water, MREs, satellite telephones, and building supplies.

• Temporary housing for the responding teams is needed to provide the safe and 

sanitary off-duty living environment. Response teams cannot rely on the availability of local housing. Trailers capable of housing 5–7 people with an independent water supply should be stored at the same location as the relief supplies and trucks and be a part of the supplies and equipment sent into the area 

for airport relief effort.

As the Airports Disaster Alliance Group evolves it is clear that we have the technical expertise to provide on-site and immediate relief that will help an airport recover and resume operations; but it is also clear that our efforts require federal support to provide the necessary coordination with state and local relief efforts, and to 

19

provide the necessary supplies, equipment and materials necessary to conduct disaster relief operations. 

Thank you for the opportunity to speak this morning.

Senator BURNS. And now we will hear from Ms. Deborah 

McElroy, President, Regional Airline Association. Thank you for 

coming this morning. 

STATEMENT OF DEBORAH C. MCELROY, PRESIDENT, 

REGIONAL AIRLINE ASSOCIATION 

Ms. MCELROY. Thank you, Mr. Chairman, Members of the Committee. I will begin by briefly giving some information about the 

Regional Airline Industry. These carriers use 9 to 108 seat airplanes, and last year they transported one out of every five domestic passengers. We serve 655 of the 664 airports in the United 

States with scheduled commercial service. At 479 or 72 percent of 

these communities, regional airlines provide the only source of 

scheduled air transportation. Of those communities, 99 in the lower 

48 States, as well as 3 in Hawaii and 33 in Alaska, receive subsidized air service through the Essential Air Service Program, EAS. 

The majority of regional airline service is provided in partnership 

with the major carriers under co-sharing agreements. 

In 2004, 99 percent of 135 million passengers transported by regional airlines traveled on co-sharing airlines. These partnership 

agreements, which provide benefits for passengers and the airlines, 

have two broad methods of revenue sharing. The first, prevalent 

among larger regional carriers operating regional jets, occurs when 

a major and a regional carrier enter into a fee for departure, or capacity buy agreement, where the major fully compensates the regional airline at a predetermined rate for flying a specific schedule. 

The second arrangement, common to smaller, turboprop operators, occurs when the major pays a portion of the passenger ticket 

revenue. This is referred to as ‘‘pro-rate’’ or ‘‘shared revenue’’ flying. 

While regional airlines with pro-rate agreements are most vulnerable to cost increases and the recent fuel cost crisis, it is important to note that the fee for departure carriers also suffer when 

fuel costs increase this dramatically. Even if the regional airline is 

fully compensated by the major carrier for fuel costs, the majors 

must take into account those increased costs and the markets profitability into consideration when route and capacity decisions are 

made. 

Major carriers have no choice but to eliminate small community 

routes that lose money for long periods, even if those routes contribute some connecting revenues to the mainline system. 

My colleague, Jim May, has provided excellent data on the increase in jet fuel costs, so I will not repeat this important information, but I would like to point out the regional carriers, like their 

major counterparts, have taken steps to minimize fuel burn by lowering cruise speeds, safely altering approach paths, and reducing 

onboard weight. We also have worked in cooperation with the Air 

Transport Association in tankering fuel to airports were supplies 

are limited. Nonetheless, fuel now ranks as the second highest cost 

for regional airlines just behind labor. 

20

Regional carriers with both types of compensation arrangements 

are clearly feeling the strain, but essential air service carriers, 

whose rates are set at 2-year levels by the Department of Transportation, are seeing major troubles as well. There were problems 

before Hurricane Katrina devastated the Gulf region, but that tragedy has made a bad situation even worse. As part of the EAS application process, carriers must project costs and profits over this 2-

year time frame. It is no easy task in today’s volatile cost environment. 

Historically, in cases of unexpected cost increases, essential air 

service carriers have had to enter into the unpalatable process of 

filing notice to terminate service in 90 days to begin the process of 

working cooperatively with DOT to seek compensation rates that 

cover the increased costs. This inevitably caused ill will between an 

airline and the community, and the process also forced an airline 

to operate at a loss for 180 days while DOT reopened the competitive bidding process. This is true despite a cornerstone of the original EAS law which provides that no carrier should be forced to 

serve a community at a loss. 

Under the leadership of this Subcommittee, Section 402 of Vision 

100 was enacted, providing DOT flexibility in its rate-making process in instances where carriers experienced increased costs, defined 

as a 10 percent increase or more, consistent for two or more consecutive months. Unfortunately, DOT has declined to use this tool 

Congress afforded it to reconcile fuel cost increases and EAS subsidy rates, citing the need for a specific appropriation. As a result, 

carriers are losing money every day on EAS routes and this service 

is in jeopardy. 

RAA stands ready to help Congress further enact EAS program 

reforms as the next FAA Preauthorization takes place. We join our 

ATA colleagues in requesting that Congress provide appropriate relief from the 4.3 cent-a-gallon tax on jet fuel. 

But there is another issue unique to regional carriers that we 

would like Congress to consider. The jet fuel tax change included 

in the Highway Bill now requires airlines to pay 24.4 cents up 

front for fuel purchases and file for a rebate from the IRS. This system which places the burden on airlines to apply and wait for a refund of the difference is causing a severe cash crunch for this nation’s smallest airlines. These airlines, unlike the major carriers, do 

not have any ticket tax payment to offset the fuel tax payments, 

because in modern code-sharing relationships, we do not issue the 

tickets. We urge you to amend the law and, in the interim, to require IRS to refund the taxes on a monthly basis. 

Finally, we urge you to work with your colleagues on the Appropriations Committee to educate them on the need to appropriate 

the full, authorized amount of $127 million to prevent service loss 

at many communities across the nation. 

Thank you for the opportunity to testify and I will look forward 

to responding to your questions. 

Senator BURNS. Thank you. 

[The prepared statement of Ms. McElroy follows:]

21

PREPARED STATEMENT OF DEBORAH C. MCELROY, PRESIDENT, REGIONAL AIRLINE

ASSOCIATION

Introduction and Background 

Good morning. Mr. Chairman and Members of the Subcommittee, on behalf of the 

45 airline members of the Regional Airline Association, thank you for inviting me 

to appear before you today to discuss escalating fuel costs and impacts on regional 

airline operations and Essential Air Service in the wake of Hurricane Katrina. 

I am Deborah McElroy, President of the Regional Airline Association, or RAA. 

RAA represents regional airlines providing short and medium-haul scheduled airline 

service connecting smaller communities with larger cities and hub airports operating 9 to 68 seat turboprops and 30 to 108 seat regional jets. Of the 664 commercial airports in the nation, fully 479 are served exclusively by regional airlines. This 

means, at 72 percent of our nation’s commercial airports, passengers rely on regional airlines for their only source of scheduled air transportation. 

Of those communities, 99 communities in the lower 48 states as well as three in 

Hawaii and 33 in Alaska receive subsidized air service by regional carriers through 

the Essential Air Service Program, or EAS, which was enacted as part of the Airline 

Deregulation Act of 1978. The EAS program was crafted to guarantee that small 

communities served by certificated air carriers before deregulation would maintain 

a minimum level of scheduled air service after deregulation. 

The program has been in effect each year since 1978 at various funding levels and 

through several eligibility criteria adjustments that take into account distance from 

nearby hub airports and other factors. Most recently, in Fiscal Year 2005, the EAS 

program was funded at $104 million. The House appropriation for FY06 was $105 

million and the Senate Appropriation at present stands at $110 million. RAA estimates the program will need a full $127 million in order to function as enacted during FY06 and we remain committed to working with Congress to ensure that the 

larger EAS appropriation—critical for the program—is enacted. 

With your permission, I will return to this topic. First I would like to discuss some 

characteristics of regional airline service. Many of you already know that the majority of regional carriers operate in partnership with the major airlines under codesharing agreements. In fact, in 2004 99 percent of the 135 million passengers transported by regional carriers traveled on code sharing airlines. Code sharing agreements, which provide benefits for passengers, regional and major airlines, have two 

broad methods of revenue sharing. The first, prevalent among larger regional carriers operating regional jets, occurs when a major and regional airline enter into a 

‘‘fee for departure’’ or ‘‘capacity buy’’ agreement where the major compensates the 

regional airline a predetermined rate for flying a specific schedule. Within this arrangement are mandatory standards for customer service, on-time performance and 

baggage handling requirements and incentives rewarding excellent performance. 

A second arrangement, common to smaller, turboprop operators, occurs when 

major airlines pay regional airlines a portion of passenger ticket revenue. This is 

referred to as ‘‘pro-rate’’ or ‘‘shared revenue’’ flying. 

While regional airlines with pro-rate agreements are most vulnerable to cost increases and the recent fuel cost crisis, it is important to note that fee-for departure 

carriers also suffer when fuel costs increase this dramatically. Even if the regional 

airline is compensated by the major airline for fuel costs, the majors must take 

those increased costs and the market’s profitability into consideration when route 

and capacity decisions are made. Major carriers have no choice but to eliminate regional routes that lose money for long periods, even if those routes contribute some 

connecting revenues to the mainline system. As you know, most of the major airlines are experiencing some of the most daunting challenges in the history of the 

industry. They cannot afford to continue unprofitable routes and when this service 

is discontinued, regional airlines and passengers in small communities suffer as 

well. 

With jet fuel costs expected to rise by more than $9 billion this year, regional airlines are being hit hard. In July 2005, jet fuel averaged $1.66 per gallon—52 cents 

more than in July 2004. According to one RAA member, this meant that the 592 

gallons of fuel required for a 40 seat regional jet to fly approximately 600 miles cost 

$1,024 in July 2005 compared with $600 just one year before. The effect of Katrina 

has produced an even more dramatic jump in fuel costs so that even with load factors at an all-time high, the U.S. airline industry collectively is struggling financially due to the unprecedented jump in oil prices and an even more dramatic increase in the price of jet fuel. 

Regional airlines are providing critical service to smaller communities with airplanes that use much less fuel than larger aircraft. Turboprop aircraft are among 

the most fuel efficient aircraft for short-haul routes and RJs have some of the most 

22

modern, fuel efficient engines in the airline industry. Like our major airline counterparts, regional carriers have sought to minimize fuel burn by tankering fuel, lowering cruise speeds, safely altering approach plans and reducing onboard weight, 

making every effort to manage escalating fuel costs with an eye toward conservation. Nonetheless, fuel now ranks as the second highest cost for airlines, ranking 

just behind labor. 

Regional airlines with both types of compensation arrangements are certainly 

feeling the strain. But Essential Air Service carriers, whose rates are set at twoyear levels by the Department of Transportation (DOT), are seeing major troubles 

as well. There were problems before Hurricane Katrina devastated the gulf coast on 

August 29, 2005, but that tragedy has made a bad situation even worse. 

Hurricane Katrina 

Fuel costs were already devastatingly high for U.S. carriers before Hurricane 

Katrina crippled oil and gas operations in the Gulf Coast and shut down most of 

the output from the region. Because my colleague from the Air Transport Association went over these numbers in detail, I will focus on service impacts, except to 

underscore the fact that Katrina initially wiped out 19 percent of domestic refining 

capacity, including 13 percent of the nation’s daily jet fuel production. Further, oil 

imports are down 10 percent because of Katrina’s extensive damage to Louisiana’s 

major oil-import terminal. 

By September 1, jet fuel prices had risen 49 cents per gallon to $2.36, from $1.87 

on August 17. While recovery efforts and action by various federal agencies have 

led to the price of jet fuel being $2.00 per gallon today, this cost remains untenable 

for major and regional carriers alike. 

Some lawmakers have suggested that carriers pass along fuel increases to passengers. But competition has not become less intense just because fuel prices have 

skyrocketed. In fact, regional airlines compete not only carrier to carrier. In shorthaul markets, we compete with the automobile. Data from the most recent DOT Inspector General’s ‘‘Aviation Industry Performance’’ report indicates that scheduled 

flights in markets of 249 miles or less declined 26 percent when you compare July 

2005 to July 2000. For regional airlines, significant fare increases can mean significantly fewer passengers. 

Business passengers, who constitute more than 65 percent of regional airline travelers, have embraced advances in communications technology, making traveling 

more elective than ever and highly price-sensitive. Airlines may be able to enact fuel 

surcharges, but these surcharges would still fail to recoup the losses incurred due 

to the recent spike in fuel costs. Further, given the numerous differences in pro-rate 

agreements for smaller regional airlines, it is likely that the increase in revenue 

from their pro-rata portion of the fuel surcharge would not fully compensate them 

for their increased fuel costs. 

Essential Air Service 

The Essential Air Service program is administered by the Department of Transportation, where ‘‘best and final’’ competitive proposals are submitted by regional 

carriers. The Department selects carriers and establishes EAS subsidy rates based 

on that bidding process. 

If a carrier is the only airline serving an EAS eligible community and wishes to 

exit the market, DOT regulations require it to file a 90 day service termination notice. DOT may hold that carrier in the market during this period, while a subsidy 

eligibility review or competitive bidding process is undertaken. Likewise, carriers 

operating EAS subsidized routes must also file a 90 day service termination—subject to even more onerous hold-in policies—in order to trigger a renegotiation of 

rates if costs increase significantly during the lifetime of the rate agreement. 

As part of the EAS application process, carriers negotiate in good faith with DOT 

on subsidy rates that remain in effect for two years. As part of the competitive bidding process, EAS carriers must project costs and profits over this two-year timeframe—no easy task in today’s volatile cost environment. In cases of unexpected cost 

increases, EAS carriers have no tool to renegotiate rates and must instead enter 

into the unpalatable process of filing notice saying that the carrier intends to terminate its service in 90 days to begin the process for seeking compensation rates that 

cover their increased costs. This inevitably causes ill-will between an airline and 

community, in some cases fostering a sense of unreliability that ultimately undermines the use of the air service and further drives up subsidy rates (as fewer passengers traveling causes air fares to climb). And the process also forces carriers to 

operate at a loss for 180 days while DOT reopens the competitive bidding process. 

This is true despite a cornerstone of the original EAS law which provides that no 

carrier should ever be forced to serve any community at a loss. 

23

During deliberation of Vision 100, the most recent FAA Reauthorization bill, Congress noticed the destructive effects of rising fuel costs on the EAS program. Under 

the leadership of this Subcommittee, Section 402 of Vision 100 included a provision 

giving DOT flexibility in its rate-making process in those instances where carriers 

experienced ‘‘significantly increased costs.’’ With an eye to preventing deliberate cost 

underestimation, Congress included an index where ‘‘significant increase’’ is defined 

as a 10 percent increase in unit costs that persists for two or more consecutive 

months. Unfortunately, DOT has declined to use the tool Congress afforded it to reconcile fuel cost increases and EAS subsidy rates, citing the need for a specific appropriation. As a result, carriers are losing money on EAS routes in unprecedented 

numbers. 

As just one example, in July 2004, the fuel cost for a Beech 1900 on a one-hour (block time) flight was $133.41. In July 2005, the fuel cost had increased to $202.12, 

nearly 52 percent higher. Only two months later, for the week ending September 

2, fuel costs for that flight were $272.51, up 35 percent from July. These figures 

utilize jet fuel purchasing formulas commonly employed by regional airlines, based 

on cost data tracked in the Energy Information Administration’s Weekly Petroleum 

Status Report. It is important to note that these figures calculate base fuel cost 

only—they do not include ‘‘into plane fees’’ and federal, state and local fuel taxes. 

The overall losses across all EAS carriers are staggering and the program, as we 

know it, is in jeopardy. 

In fact, we estimate that current fuel cost increases for all carriers in the program 

will drive up program costs significantly even if not one more community becomes 

eligible in the next fiscal year. Yet, according to the DOT website, there are currently 60 EAS-eligible, single-carrier markets which could come into the program. 

(While more than 60 communities are technically ‘‘eligible’’ I am referencing those 

that received service pre-deregulation and do not meet other disqualifying factors 

such as distance to nearby airports). Of those 60 communities, anywhere from 15 

to 30 could begin to require subsidy should the carriers file termination notices. 

Given the significant reductions in small community service and substantial cost increases affecting the airlines, it is reasonable and responsible to plan for more than 

half of all eligible communities to soon require subsidy. Under even the most optimistic scenario, therefore, the DOT will need at least $127 million in Fiscal Year 

2006, to run the program. This Appropriation should also contain a line-item directing DOT to utilize the rate-adjustment tool afforded by Vision 100 to accommodate 

dramatic fuel cost increases. 

Early versions of a Senate appropriation sought to fix this problem by prohibiting 

newly eligible communities from collecting subsidy; yet such a prohibition runs 

counter to the original intent of the law, which guarantees air service to eligible 

communities. 

RAA stands ready to help Congress enact further EAS program reforms as the 

next FAA reauthorization takes place. We are eager to discuss a rewrite of the eligibility criteria, realizing that some rules set nearly three decades ago no longer 

apply. Nonetheless, the most important thing Congress could do right now to help 

passengers in EAS communities and the airlines is to release the full authorized 

amount of $127 million for the EAS program in FY06 and to require DOT’s cooperation in making real-time rate adjustments for cost increases. 

Request for Congressional Action

• Considering the staggering impact that increased fuel costs have brought for 

U.S. regional and major airlines alike, RAA requests, along with our colleagues 

at the Air Transport Association, that Congress provide a tax holiday on the 

$4.3 cents-a-gallon tax on jet fuel. Further, we request that any fuel surcharge 

charged by carriers be exempt from the existing 7.5 percent passenger ticket 

tax.

• We further request that Congress reconsider changes to the jet fuel tax rate 

that were made as part of the American Jobs Creation Act enacted last year 

and the additional proposed change included in the Highway bill that would require airlines to pay 24.4 cents up front for fuel purchases and file for a rebate 

from the Internal Revenue Service (IRS). This system, which places the burden 

on airlines to apply and wait for a refund of the difference, with tax on jet fuel 

at $4.3 cents per gallon, is causing a severe cash crunch for smaller regional 

airlines. Changes already implemented by the American Jobs Creation Act 

brought the upfront costs to 21.4 cents per gallon with the highway bill poised 

raising the burden even further. Regional airlines do not have any ticket tax 

payments to offset the fuel tax payments because, in modern code sharing relationships, we do not issue the tickets. We urge you to amend the law and, in 

the interim, to require IRS to refund the taxes on a monthly basis. This tax 

24

and refund procedure places a tremendous burden on airlines and impacts cash 

flow at a time when carriers are already struggling mightily from fuel costs.

• Finally, we urge you to work with your colleagues on the Appropriations Committee to educate them on the need to appropriate the full, authorized amount 

of $127 million dollars to keep the important EAS program afloat during this 

period of dramatic fuel cost increases. The fuel cost increases resulting from 

Hurricane Katrina have further injured the financial state of EAS carriers who, 

without rate adjustments and compensation for increased fuel costs, cannot continue to sustain service at a loss. Only a full appropriation of $127 million can 

prevent service losses at multiple EAS points across the nation.

Conclusion 

Thank you for the opportunity to testify on this important issue today. I look forward to responding to your questions at the conclusion of the panel.

Senator BURNS. And I have one question that I want to ask of 

Mr. May and then I have some more follow-up questions. Mr. May, 

are your members right now paying higher fuel prices on their 

international flights and where they purchase fuel at foreign airports? 

Mr. MAY. Excuse me. Mr. Chairman, the $9 billion increase yearover-year from 2004 to 2005 is both domestic and international. So 

the answer is, yes, we are indeed. 

Senator BURNS. Did we hit such a spike on our international airports as we did domestically? 

Mr. MAY. The answer is no, because of the weakness of the dollar. Fuel is more affordable, if you will, not as expensive in Europe 

as it is here in the United States. 

Senator BURNS. Senator McCain. 

Senator MCCAIN. Thank you, Mr. Chairman. 

Mr. May, you would like to see some relief from some of the taxation, is that correct? 

Mr. MAY. Yes, sir. 

Senator MCCAIN. Then your first priority is the 4.3 cents jet fuel 

taxes, is that correct? 

Mr. MAY. Senator McCain, we think that tax was intended originally to be temporary, used for deficit reduction, but has remained 

on the books, albeit in favor of the Aviation Trust Fund, is the best 

candidate for short-term immediate relief with the understanding 

that it is equally important that we keep the trust fund whole. It 

scores at about $600 million, and I think we would hope that the 

Congress would entertain a one-time supplemental to the trust 

fund to keep it whole. 

Senator BURNS. Are you calling for a permanent or temporary 

suspension of the jet fuel tax. 

Mr. MAY. Mr. Chairman, we pay $15 billion a year in taxes and 

fees. I would like to reduce that level across the board. I think in 

the 2007 Reauthorization, the seven fees that we currently pay to 

the Trust Fund ought to be consolidated into one, and we ought to 

find a better way to do it. But for the immediate term, I think a 

temporary holiday, if you will, of a year would be the most appropriate course of action. 

Senator MCCAIN. I would like for you to stop by the next time 

we have an Amtrak hearing and hear the Amtrak people complain 

about how much we subsidize the airlines as opposed to our much 

needed Sunset Limited. 

25

Let me ask you: Now we have got two airlines going into bankruptcy. When an airline is in bankruptcy, it no longer has to fulfill 

certain requirements, right? 

Mr. MAY. The airline has certain leverages that——

Senator MCCAIN. Or any organization that goes into bankruptcy——

Mr. MAY.—it does not have outside of Chapter 11, right. 

Senator MCCAIN. Among those are payments in the pension 

fund. 

Mr. MAY. That is correct. 

Senator MCCAIN. So—and how many airlines do we have in 

bankruptcy now? 

Mr. MAY. Sir, we have got United Airlines, U.S. Airways, and 

ATA of my membership that are currently in bankruptcy. We have 

the prospect of two more today or within a short period of time, 

which would mean that some 47 percent of capacity in the United 

States is in Chapter 11. 

Senator MCCAIN. And all of those airlines are no longer paying 

into their pension funds? 

Mr. MAY. Senator, I am not sure that is correct, but I am not the 

expert on the pension issues. 

Senator MCCAIN. I think it has been reported in the media. I 

worry about that. Does that mean that you are—that the airline 

industry has taken a position on increasing retirement age of pilots? 

Mr. MAY. We have as ATA held a position that the retirement 

of 60 ought to be maintained. 

Senator MCCAIN. That is remarkable. Just out of curiosity, on 

what basis? That these pilots, if they stay until the age 62, are too 

old? 

Mr. MAY. No, I do not think it is based on age or incompetence 

at age 60. It has been a standard in the industry for some period 

of time. 

Senator MCCAIN. So do not change it. It is interesting. I am sure 

other members of the Committee have the same experience; I am 

approached by pilots in the airports all the time, and I can tell by 

looking at them whether they are in favor of increasing retirement 

age or whether they are in favor of keeping it the same. 

Mr. MAY. Well, as the Senator points out——

Senator MCCAIN. The younger ones feel the same. 

Mr. MAY. There is a dispute among the pilot community as to 

which way to go. 

Senator MCCAIN. Yes, that is what I tell them in response. Twenty percent—twenty-six percent of the total ticket price that is paid 

by a passenger now goes in some form to fees or taxes, is that correct? 

Mr. MAY. On an average $200 ticket, which is close to the average today, yes, sir. 

Senator MCCAIN. If we do nothing—suppose the Congress and 

the Federal Government do nothing. What is going to happen in 

the airline industry? Consolidation; airlines going out of business; 

limp along and go in and out of bankruptcy as we have seen; further restructuring and, finally—well, go ahead and respond to that. 

26

Mr. MAY. Senator, I think that the industry has taken extraordinary steps for self-help over the past couple of years and, as I 

said in my testimony, were it not for fuel right now, I think this 

would be a profitable industry. At the same time, I think it is unrealistic to suggest that there is not going to be additional consolidation in this industry. 

Both domestically and if Congress changes the law, I think there 

will be international consolidation. We, live, work, fly in a world 

economy, if you will, but our hope is that this Congress will take 

a hard look at not only the overall tax and fee structure that we 

have but the impact of fuel, in particular, on the industry. 

Senator MCCAIN. Well, I hope we do, Mr. May, because I, among 

others, rely on the board of experts who believe that the price of 

fuel is never going to go down significantly due to increased demand on the part of other nations. Would you submit to the Committee specific changes that you would like to see and, as far as 

any other relaxation—would just the jet fuel tax do it for you? 

Mr. MAY. No, sir. It is only a small step in the right direction. 

I think that Congress needs to revisit the entire tax and fee equation that applies not only to this industry, but that is tied inextricably to the appropriate growth and change necessary at FAA 

and the overall air traffic control system. 

Senator MCCAIN. I would ask that you would submit to the Committee a detailed position as to what you would like, what kind of 

relief you would like to see——

Mr. MAY. I would be happy to do that, sir. 

Senator MCCAIN.—take place. 

I thank you, Mr. Chairman. 

Senator BURNS. Senator Stevens—oh, Senator Lott has joined us. 

Do you have a statement, Senator Lott? 

Senator LOTT. I will wait until after Senator Stevens. 

Senator BURNS. OK. Thank you. Go ahead. 

The CHAIRMAN. Thank you very much, Mr. Chairman. 

Mr. May, one of the things we are doing on the Committee is reviewing all of the laws that apply that have come out of this Committee and determine whether there are roadblocks in them that 

prevent our making waivers and doing things which give us a 

chance to have some application of current revenues and current 

preparations to the recovery, and use current authorities without 

having massive new legislation. 

Have you examined any of the laws present about conditions or 

requirements under those laws that are currently preventing the 

airlines from taking steps that are necessary in view of the disaster 

and recovery from the disaster? 

Mr. MAY. Mr. Chairman, I have noted a couple things in my testimony and, certainly, relief on the 4.3-cent tax is one. We suggested to the Department of Transportation that we be permitted 

to impose fuel surcharges separate and apart from the actual ticket 

price. They took some action yesterday to put out for a notice of 

comment in rulemaking whether or not to eliminate those rules altogether, and we appreciate the direction that Secretary Mineta 

has taken on that point. 

I think there are a number of areas that Ms. McElroy has identified this morning that are specific to the regional side of this busiVerDate 0ct 09 2002 13:45 Jan 24, 2006 Jkt 025443 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 S:\WPSHR\GPO\DOCS\25443.TXT JACK PsN: JACKF
27

ness, part of which is owned and operated by my carriers, part of 

which operates on a separate basis. 

We would be happy to reexamine some specific areas in the regulatory process that may be of some benefit and submit that to the 

Committee as Senator McCain has suggested. 

The CHAIRMAN. Now, for last year the airlines that altogether paid $15 billion into Federal taxes? 

Mr. MAY. Yes, sir. 

The CHAIRMAN. But they lost $10 billion overall. Have you 

looked, again, now, at these taxes? You have asked us to suspend 

the one. 

Mr. MAY. Yes, sir. 

The CHAIRMAN. The airlines are the only entity in the country 

that collect from their customers the costs, or at least partially the 

costs, of security. 

Mr. MAY. Yes, sir. 

The CHAIRMAN. Have you looked at that? Should we reduce that 

or in any way find some way to reduce the cost of the security program in order to free up more area for your increase in fares? 

Mr. MAY. Senator, we pay, as you have just noted, a little bit 

north of $15 billion a year in taxes and fees. That includes some 

$3 billion to $3.5 billion a year directly to DHS/TSA. I think we are 

one of the only industries that directly undertakes funding of TSA 

and DHS. We do it through five different taxes and fees. We have 

seven different taxes and fees that underwrite the lion’s share of 

the Aviation and Airport and Airways Trust Fund. 

I think it would be fully appropriate for this Committee to take 

a long, hard look at that entire funding equation and make a determination as to what ought to remain, what ought to be jettisoned, 

and how we can help reduce the overall impact of 26 percent on 

an average $200 ticket, which is far greater than any other industry in the United States pays in taxes and fees, greater even than 

alcoholic beverages and tobacco products where taxes are used as 

a disincentive to consumption. 

The CHAIRMAN. We have provided that some of the airports could 

take over their own security if they desire to do so. To my knowledge, only one did. Have you had any contact with the airports to 

see whether they could take over the security and reduce the costs? 

Mr. MAY. I think that the airports have had a long working relationship with TSA on that very issue. I think the Senator is correct 

that there was only one airport that took advantage of that opportunity to date. I am not sure, Senator, that there is a huge dollar 

difference if it is privatized or federalized. I think the dollar impact 

is roughly the same. 

The CHAIRMAN. Well, what about your costs—the airlines’ costs 

of the modernization of airports for, say, the passenger portion? 

That is substantial, is it not? 

Mr. MAY. We find that the hassle factor, if you will, opposed by 

TSA is having a direct impact on our potential customers. A number of people are driving or using other modes of transportation as 

opposed to going through the hassle factor. 

At the same time, there are significant costs that get imposed on 

the carriers, sort of the end reimbursed costs from catering security 

to direct security at airports, to cost of inline EDS, et cetera. We 

28

have suggested for some time that we need to take a hard look at 

how TSA is funded and make a determination as to whether or not 

it ought to be through the carriers themselves, either through fees 

imposed in taxes or un-reimbursed expenses, or airport derived expenses, or through general tax revenues. 

The CHAIRMAN. It just seems to me there is a lot of chefs stirring 

this stew, and I wonder if we have to go into debt when the overall 

structural relationship of government to airlines, and part of it is 

in the tax base and that is hard to deal with, but I do think we 

ought to take a real long look. We do not have the time now during 

this disaster period, but I think we ought to take a long look at totally revamping the relationship of government to the airline system and deal with some of those taxes in a way of trying to find 

some way to reduce the redundancy and the management that 

comes from county and local and airport executives, and entities 

themselves, but the ownership concept. All of those things are leading to problems. 

I know I am taking a little bit more time. I would like to ask 

Mr. Miller about the problem. 

You said that one of the problems was, as I understand it, you 

had to go to too many entities to deal with disasters and you would 

like some way to go directly to the coordinator and you suggested, 

I think, that we should go into some concept of regional 

prepositioning of disaster equipment. Could you enlarge on that a 

little bit? 

Mr. MILLER. Yes, Mr. Chairman. What we found out is that during the immediate times following that natural disaster, that there 

is a need for a lot of equipment, building materials, supplies, but 

that we have to work through multiple state agencies in order to 

get those supplies in there. The airports that are responding want 

to respond to that airport. They want to get there as quickly as 

they can, but there are protocols that have to be followed. As I stated, Bruce Fraylik was required to contact the Mississippi EOC, 

which would then contact either the State of Florida or Georgia or 

South Carolina to initiate a request for a specific airport. 

We feel that if we had one point-of-contact within FEMA, they 

could be making those contacts for us. They could be asking those 

airports to respond. They could be issuing the mission numbers 

that would allow those airports to respond as quickly as possible. 

The State Emergency Operations Centers are so involved in all the 

community-wide disaster relief that we do tend to get overrun. We 

do feel that to make it easier for them and for us, that a direct 

point of contact within FEMA would help to facilitate the response 

from the other airports. 

The CHAIRMAN. We will follow up on that. 

Last, Ms. McElroy, all of us are not—at least, I am not familiar 

with this 24-cent Highway Act provision you were talking about. 

Ms. MCELROY. What I heard from the carriers, Senator, is that 

there was—thank you. What I have been informed from the carriers is, because of concerns about jet fuel which head the lower tax 

rate, concerns about that being fraudulently purchased by other 

consumers, the change was made to increase that tax rate, and 

then the airlines filed for a return of the overage that they paid, 

if you will, over the 4.3 cents. 

29

It is my understanding from talking to the major carriers, that 

they have been able to use ticket tax revenues owed to the government to offset those fuel payments and, as a result, it has not 

caused the cash crunch it has for some of the very smaller regional 

airlines. I would certainly be willing to provide you additional information specifics. 

The CHAIRMAN. That is good. Can you get us a one-pager? 

Ms. MCELROY. Yes, sir. 

The CHAIRMAN. Or we can talk with the tax people at the Finance Committee and Ways and Means about that. 

Ms. MCELROY. Yes, sir. We would very much appreciate that. 

The CHAIRMAN. Thank you very much. 

Thank you, Mr. Chairman. 

Senator BURNS. Senator Lott. 

STATEMENT OF HON. TRENT LOTT,

U.S. SENATOR FROM MISSISSIPPI 

Senator LOTT. Thank you, Mr. Chairman, for having this hearing 

so quickly to address the problems and the needs of a very critical 

part of our economy, the aviation industry. 

I hope that you, as Chairman of the Subcommittee, and you, Mr. 

Chairman, will continue as you have been to identify specific things 

that, maybe, can be done very quickly to provide some relief and 

some help and, as in the case of my own state, and probably Pensacola has experienced this, too, there is not enough—the state is 

only eligible for, like, $5 million for repairs through AIP. Just some 

little modification in the existing law would allow us to get more 

like $35 or $40 million, which is what we will need to do the repairs at our airports in the aftermath of Hurricane Katrina, and 

there are other areas where I think we can take some small actions 

or quick actions that would make a big difference. 

I want to thank the industry for the expeditious handling and 

management of the effort to get our airlines and our airports back 

up and operating. FAA, I think, should be commended for their efficiency in getting our Mississippi airports back up and running. 

Gulfport/Biloxi Regional is fully operational. Jackson International 

is only temporarily shut down. Even Stennis International Airport 

has been open. 

In all of this negativity and complaining, I do think that the effort that has been made by the Administration, by FAA, by the airports, and by the airlines deserve credit. We particularly appreciate, in my state, the fact that Delta and Northwest and Continental American, they are all back in there, and they are back very 

close to a full service. That is very, very important. 

Also, even though you are struggling financially as an industry, 

many of your companies have been generously involved in providing transportation, and supplies, and contributions. And we do, 

we recognize that, and we thank your industry. And I put a list of 

companies that have done that sort of thing beyond the call of duty 

in the Congressional Record when I first returned last week. And 

the list is there and it includes some of the airlines. 

Now, with regard to energy: Sir, are we still releasing oil from 

the SPRO in view of the disaster decline and supply, and the spike 

in price? 

30

Dr. GRUENSPECHT. I think the bids on the SPRO release were received last week and they are under evaluation in the Department, 

and I think you will hear from the Secretary of Energy in the very 

near future on that. 

Senator LOTT. I would have hoped he would have moved quickly. 

It has been 2 weeks——

Dr. GRUENSPECHT. Well, we already have——

Senator LOTT.—and the problem was there before the hurricane. 

Dr. GRUENSPECHT. Right. And we have a couple things. One, 

there have been loans of oil that have already taken place to the 

refiners. In terms of the release of SPRO, there is a process that 

has to be followed. 

Senator LOTT. Cut the process in half, please, sir. Get rid of bureaucratic crap and rules and I mean we need supply. My hometown refinery, which has the capability of refining 365,000 barrels 

a day, is shut down. We have got the channel open so we could 

bring in oil as soon as they are able to go back into being operational, but they also had the jet fuel and gasoline in their tanks 

which they immediately started distributing but they have about 

done all they can there. 

I can just—I want the Administration, the Energy Department, 

that people are emotionally very distraught by what they have seen 

from the hurricane. They do feel very tense about Iraq obviously, 

but the thing that is making the people the maddest has been 

when they go to the pump to fill up their tanks. Now, you can give 

me a lecture about freeing up, supply and demand, and all that 

other stuff. It is not good enough. We had better realize there is 

a problem with certain farmers, small businessmen and women——

Dr. GRUENSPECHT. I understand——

Senator LOTT.—with children, and we, at least, need to improvise. Can we at least say, ‘‘This is bad. We know it is bad’’ and take 

a look, like we care and we are doing something about it? And I 

think the Energy Department needs to be a little bit more aggressive in jawboning the industry as a whole; and I do not know—I 

am not prepared to take irrational actions. But if we do not get 

some change in energy prices and supply and all of that, the American people are going to demand that we do something and it may 

not be good. So, pass that back to the Secretary and the Administration. Cut the baloney in half. Let us get some action, please, sir. 

You know, I have tried very hard to be helpful to the aviation 

industry, enjoyed being Chairman of the Subcommittee. We did 

pass some specific funding after we went into Iraq. Of course, we 

did have specific action after 9/11. We have passed a temporary 

pension change a year or so ago. We did quickly move a new, broad 

and, I think, good FAA reauthorization. So, we have made some 

real efforts, and yet the difficulties continue or get worse. 

And I know that you are in this situation because of bad laws 

on the books that we passed in terms of how you handle labor negotiations, bad management decisions over a period of years that 

have now come to roost with the current management team at the 

aviation industry. And I think you have some good people in place 

now, but decisions that were being made 5 to 10 years ago are now 

just devastating to industry. 

31

I know that we have unaffordable labor contracts. I know we 

have unrealistic pension laws. I know that you have heavy fees and 

taxes that are a real drain, and now you have been hammered with 

the rising fuel costs and, to cap it all off, Katrina. It caused millions of dollars of loss by flights that were shut down and flights 

that are not flying yet. So, jiminy, it is a big problem. 

Now, I just got very concerned about everybody going into bankruptcy. I do not see how we can stand to let it happen. We need 

more common sense by the industry people, broadly; and we need 

to do more in Congress to deal and to have a realistic plan for the 

future of aviation. 

So, I am hoping that we will do three things: One, that the 

Chairman of the Subcommittee and the full Chairman will quickly 

pass some changes in the laws that could have quick effect on helping the industry, everything from the airports and regional airplanes and the industry as a whole. Two, what broader things can 

we do that will have a positive effect? And, three, what is the longterm plan? 

You know, in my own area, which is devastated, we are not just 

looking at this as recovery and reconstruction, but we want renaissance. We want this to be an example that will really make it a 

shining recovery and one that we can all benefit from and the 

country can learn from. I hope the industry will be thinking about 

that too, because we need the aviation industry. 

There are just so many things—I have so many problems with 

TSA. You know, I have so many problems with the indefensibility 

of your ticketing pricing arrangements. Being from a rural state 

and flying into Kentucky a lot, sometimes I do not understand why 

you can fly for $200 here and $1,100 somewhere else but we will 

get into that another day. I know all the answers. 

Senator BURNS. You ought to live in Montana, Senator. 

[Laughter.] 

Senator LOTT. I know the arguments, but now, here is the second 

part of that equation. What could we do that maybe would have a 

bigger impact? Not just little tweaks, but there are two things: 

One, you suggested, Mr. May, the 4.3-cents-a-gallon. Now, last year 

or the year before, right at the end of the session the year before, 

I guess, last year, we repealed the 4.3-cent-a-gallon tax on railroads and barges. 

Mr. MAY. That is correct. 

Senator LOTT. Are you the only people now that are still paying 

the old 4.3-cent-a-gallon tax we put in place for deficit reduction? 

Mr. MAY. I think there are variations of that tax that are still 

paid by other industries, but we are the only transportation-related 

business that——

Senator LOTT. Now, this one we put in place for deficit reduction 

back in the nineties——

Mr. MAY. Yes, sir, 1993. 

Senator LOTT. OK. That money though——

Mr. MAY. It was supposed to be on a temporary basis. 

Senator LOTT. Temporary. Well, temporary in the eyes of the 

Chinese could be hundreds of years, so——

[Laughter.] 

32

Senator LOTT. That money does go in the Trust Fund, though, 

right? 

Mr. MAY. Aviation Trust Fund, yes, sir. 

Senator LOTT. Well, we need all the money we can get in that 

trust fund. 

Mr. MAY. Senator, I would encourage—I think we have seen a 

great deal of support on this Committee but as you, better than 

most, know, there are other Committees of the Congress, including 

the Finance Committee, who have jurisdictional priority on many 

of these taxes, and there has been some resistance on that front. 

We would encourage you to help communicate your views in that 

direction, as well. 

Senator LOTT. What did you say the dollar amount is of the 4.3? 

$600——

Mr. MAY. $600 million on a 1-year basis, we are advised. 

Senator LOTT. One other question: We have met very little discussion at all about the pension bill. Now, I know your members 

are, maybe, divided on this issue. We clearly need pension reform 

and we clearly need to correct some of the stupid things in the pension law where it is turned on its head, where if you are doing well, 

you pay less; if you are doing poorly, you pay more. 

The CHAIRMAN. Could you let me interrupt you? 

Senator LOTT. Yes. 

The CHAIRMAN. You said it would be profitable without that tax, 

but you were not talking about the payments you would owe the 

pension fund. And can you quantify the pension fund obligation of 

the airlines? 

Mr. MAY. No, sir. I would be happy to collect it and provide that 

information to the Committee. We would be profitable were it not—

this year we are already going to lose about $10 billion this year, 

between $9 billion and $10 billion. The fuel—additional fuel costs 

impact is $9 billion of that $10 billion. And then there is a component in there for Katrina. Our operating results would be significantly better if it were not for fuel. 

Senator LOTT. Do we need to find a way to pass this Pension Reform Bill that has been reported out of the Finance and Help Committee in the next week? 

Mr. MAY. Mr. Chairman, there are a number of companies that 

are in my membership that would love to have me say yes. I am 

not taking a position on the Pension Reform issue as you are well 

aware because I have got companies on both sides. 

Senator LOTT. Yes. You sound very senatorial. 

[Laughter.] 

Senator LOTT. You have friends on both sides and you are with 

your friends? 

Mr. MAY. That is exactly correct, sir. 

Senator LOTT. Let me ask somebody else, then. Mr. Miller, do we 

need to pass this pension reform? Are you going to take the same 

position? 

Mr. MILLER. I will take the same position, sir. 

Senator LOTT. How about you? 

Ms. MCELROY. Our Association has not taken a position either, 

predominately because the regional carriers have 401k programs. 

Senator LOTT. Yes. 

33

Ms. MCELROY. We are younger companies. So it is not an issue. 

Senator LOTT. OK. Thank you very much. 

Senator BURNS. To put a footnote to that, if none of you have 

taken positions on pensions, how come we are in such a big problem with pensions? Somebody has not been taking positions in the 

past, I would assume. 

Senator MCCAIN. There is a difference in the way they were 

funded by company. 

Senator BURNS. Yes, I know, and I think it behooves us, though, 

Senator, to pass that pension package and get it out there. I really 

do. When you get right down and talk it on the street, well, that 

is the way it is. 

Senator MCCAIN. Yes. 

Senator BURNS. I am not real sure there is a lot of legislation 

that we can pass, but I tell you that there are some things that 

we can do. We can cut through some red tape, and ask the DOT 

and the FAA and a lot of people who are involved in this thing to 

work with us and to make it work. 

Ms. McElroy, how many members have started filing the 90-day 

termination? Are there any starting to file those 90-day termination notices with the regionals? 

Ms. MCELROY. In the aftermath of Katrina? 

Senator BURNS. Yes. 

Ms. MCELROY. No one has filed yet, but there are several carriers that are looking at it because of the increase in fuel costs. 

Senator BURNS. And, the other day we had a hearing in Energy 

Committee about gouging. Would the crack spread indicate some of 

that, Dr. Gruenspecht? 

Dr. GRUENSPECHT. Yes, I think the crack spread, mostly which 

has increased for all products and then has fallen back to the pre–

Katrina type of situation, primarily indicates the supply and demand balance in the market. 

Senator BURNS. Well, I am not real sure that—I am, sort of, hesitant to—I am kind of like Senator Lott, on this market driven and 

spread and this type of thing. I have a hard time understanding 

this, but I would imagine when I looked at this form right here as 

far as the crack spread is concerned, I mean, that is a drastic 

spike. That is an upturn like we have never seen before in the history of the refining or fuel business. 

The CHAIRMAN. Senator? 

Senator BURNS. Yes, sir. 

The CHAIRMAN. Let me interrupt you. We have got to go vote. 

David Russell here is our general counsel. We are putting together 

a package now that goes to the leadership——

Senator BURNS. That is right. 

The CHAIRMAN.—assessment group, and that they are going to 

review and try to get joint clearance on both sides of these rifle 

shots that Senator Lott’s talking about. Individual things that we 

can do within the jurisdiction of this Committee to make it easier 

for people to deal with this disaster and the recovery that we would 

like to see the airlines have, if you have any suggestions at all, get 

them to David Russell. Those will be discussed, now, next Monday, 

and it is going to be a package that moves pretty quickly, we hope. 

We do not know, yet, but we hope that we will get some support 

34

on it, but I urge you to let us know if you think there is anything 

we can do to help you get through this period. 

Senator BURNS. My notes—and that is the reason we had this 

hearing today. I think we have gotten all the information that we 

need that is out there, private consultation with each one of you 

with regard to the legislation that is going to move and that will 

be a part of a larger package of a lot of things that has to happen 

and be done by Monday. If you would work with our staff, with our 

staff counsel and with our offices individually the next couple of 

days or so, we would certainly work on those. 

The CHAIRMAN. One last comment: The ANWR Bill was vetoed 

in 1996. If we had that pipeline filled now, we would have at least 

1.2 million barrels of oil today than we have. That is coming up 

now, again. I would urge the industries that are affected by this 

lack of supply to help us convince the Congress to go ahead and 

do what Congress said it would do in 1980, and that is let us explore that one and a half million acres on the Arctic slope. At the 

time of the last major disaster, we had 2 million barrels a day in 

that pipeline. There is less than a million barrels a day right now. 

It is a national crime in my opinion. 

Mr. MAY. Mr. Chairman, you would note that we included 

ANWR in our testimony for the first time. 

Senator BURNS. Yes, sir. 

Mr. MAY. And we will be happy to share our ideas with both you 

and Co-Chairman Inouye and his team. 

The CHAIRMAN. Thank you. 

Senator BURNS. Thank you very much. And we will close this 

hearing. But also if you have extra comments or anything like that, 

make them known to the individual Members and to the Committee. Thank you very much. We are adjourned. 

[Whereupon the hearing adjourned.] 

(35)

APPENDIX

PREPARED STATEMENT OF HON. DANIEL K. INOUYE, U.S. SENATOR FROM HAWAII

The effects of Hurricane Katrina will impact our nation for a long time, and the 

decisions made by this Congress in the coming months will provide critical support 

to the country as we recover from this disaster. 

There is no question that our aviation system is critical to the success of the 

American economy and our capacity to compete in the global marketplace. However, 

this industry was struggling long before Katrina made landfall. The storm made a 

bad situation worse. Make no mistake, this Congress will not let our aviation system collapse. Our actions in recent years—from direct financial bailouts to generous 

loan guarantees—demonstrate our commitment to keep the planes flying. I have followed this issue closely, and given Hawaii’s reliance on air service, I consider it one 

of my leading priorities. 

While I strongly support a thorough examination of Katrina’s impact on the aviation industry, I hope this Committee will also consider the litany of pressing issues 

that this catastrophe has raised. Our citizens are hurting and their confidence in 

government is deeply damaged. They have many questions, and so do I. 

Why it is that our first responders still cannot communicate with one another? 

What are we doing to ensure that our cities can evacuate the tens of thousands of 

residents without transportation? How can we reign in gas prices and eliminate attempts to gouge consumers? What are we doing to address our growing, long-term 

dependence on oil? These questions get at the heart of national public policy and 

the very purpose of government, and all of the issues they raise are in our jurisdiction. 

This Committee needs to scrutinize these issues, because they directly impact the 

livelihood and physical security of every American: 

Gas prices and attempts to gouge customers: As of Monday, gas prices officially reached an all-time high, even as adjusted for inflation. There is no doubt that 

these astronomical prices are having a sustained, detrimental impact on our economy, not to mention the finances of every American household. We need to work 

with the Federal Trade Commission (FTC) to ensure that there is no price gouging 

involved—during this disaster or any other. 

Transportation assets for mass evacuation: Tens of thousands of New Orleans’ most needy residents did not have resources to flee the city, and yet assets like 

trains and motor carriers were not dispatched in advance to aid the evacuation. We 

learned that Amtrak trains, which were poised to evacuate 600 people per trip, 

along with other assets marshaled by the Department of Transportation, sat idle, 

falling victim to the Federal Emergency Management Agency’s (FEMA) disorganization. 

Communications interoperability: Four years after the September 11 attacks 

on America, our first responders still cannot communicate with one another in a crisis. This is almost unfathomable. It is a problem that must be solved immediately 

if we are to effectively manage the chaos of either a large-scale terrorist attack or 

the next natural disaster. 

Coast Guard’s exemplary, and independent, performance: The Coast Guard 

proved to be one of the few agencies that rose to the challenges Katrina presented, 

rescuing over 30,000 victims in the early stages of the aftermath. The Coast Guard 

maintains a level of independence that proved critical in its response efforts. In fact, 

Homeland Security Secretary Michael Chertoff appointed Coast Guard Vice Admiral 

Thad Allen to direct the Katrina recovery efforts. FEMA, which was an independent 

agency before being merged into the Homeland Security Department, is now 3 appointees removed from the President, despite its life-and-death, highly time-sensitive functions. 

Fuel-efficiency standards: Katrina has demonstrated, yet again, our economy’s 

inherent dependence on oil, both foreign- and domestically-produced. It may very 

well be our country’s Achilles heel, but it should not be this way. One of the most 

immediate and effective things we can do to remedy this dependence is to increase 

36

the fuel efficiency standards of our automobiles in a meaningful way. The technology currently exists to double our oil efficiency, and employing this technology 

would not only reduce our national dependence, it would reduce fuel costs for every 

American. The time has come to make this happen for the sake of our long-term 

economic strength, not to mention our long-term foreign policy. 

Insurance coverage: As the President discovered first hand on Monday when 

he toured the Gulf region, insurers are not coming through for Katrina’s victims. 

This industry, which is so quick to come to Congress for help when times are tough, 

is not doing the same for its premium-paying customers, who are in desperate need 

of assistance. We need to take a serious look at the way property and casualty insurers are living up to the agreements they make with their customers. This Committee has examined disaster insurance before, and we need to do so again. 

Given the gravity and long-term impact of Katrina’s aftermath, our Committee 

must address these issues. Government’s central purpose is to protect the physical 

and economic security of every American, yet Katrina has exposed numerous failures and vulnerabilities at all levels of government that need to be corrected immediately. We must do our part to resolve these problems before another catastrophic 

natural disaster or, even worse, a large-scale terrorist attack. 

PREPARED STATEMENT OF HON. FRANK R. LAUTENBERG, U.S. SENATOR FROM NEW JERSEY

Mr. Chairman, thank you for calling this hearing and giving us an opportunity 

to discuss this important issue. The cost of aviation fuel is soaring like a rocket. 

Airlines are being hit hard by high fuel costs, just as American families are getting 

slammed by the high price of gas. In 1993, aviation fuel cost twenty nine dollars ($29) per barrel. Last year, the cost 

more than doubled—and it is still rising. In the wake of Hurricane Katrina, jet fuel 

prices soared 22 percent in two days! 

Every time the cost of aviation fuel increases by one dollar a barrel, it costs the 

worldwide airline industry one billion dollars! Those costs are ultimately paid by 

travelers in the form of higher fares or service cuts, or by labor in the form of cuts 

in wages or pensions. 

U.S. airlines lost some nine billion dollars ($9 billion) last year. The outlook this 

year is just as bleak. We all understand that the price of oil is subject to fluctuations in supply and demand. And we all realize that events like Hurricane Katrina 

can disrupt the supply chain. 

But I am concerned that the current price of aviation fuel is not simply a reflection of free market forces. According to the International Air Transport Association, 

the refinery margins for aviation fuel have almost tripled in the past two years—

from six dollars ($6) in 2003 to seventeen dollars ($17) today. We cannot allow the 

oil companies and refineries to take advantage of a natural disaster like Hurricane 

Katrina by gouging consumers. 

Another major factor behind rising fuel prices is the cost of crude oil, which is 

propped up by the OPEC cartel. The whole reason OPEC exists is to set quotas on 

the production and export of oil, which drive up the price by artificially limiting the 

supply. These quotas are a burden on airlines and everyday families. 

But they are prohibited by the rules of the World Trade Organization. In other 

words, the Administration is not helpless in the face of OPEC’s cartel. There is 

something we can do about this. Six members of OPEC are already members of the 

WTO, and Saudi Arabia is seeking to join. I have called on the Administration to 

take immediate action to bust up the OPEC cartel by filing a complaint through the 

WTO. 

I have introduced a bill that would instruct the Administration to file a complaint 

against OPEC through the WTO. But President Bush doesn’t have to wait for my 

bill to pass—he should act immediately to put pressure on OPEC. 

Finally, our national transportation system is especially vulnerable to disasters 

that disrupt the supply of oil because of our overwhelming reliance on automobiles 

and aviation, and under-utilization of passenger rail. 

This is just one more reminder that we must develop a balanced national transportation system—and that includes passenger rail. 

I’m proud that the full Commerce Committee overwhelmingly approved an Amtrak bill before the recess that would help correct this imbalance. That is a step in 

the right direction.

Æ